Articles PE Flashcards
What can be found out comparing IRRs of Global Private Equity and the MSCI ACWI by Vintage Year?
Private equity returns have been higher than the MSCI for every single vintage year.
MSCI ACWI
The MSCI ACWI is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International (MSCI) and is comprised of stocks from 23 developed countries and 24 emerging markets.
What is the largest part of global private equity?
U.S. buyout funds
How have U.S. buyout funds performed?
- they have outperformed the S&P 500 by a fairly wide margin.
What is an appropriate benchmark to use for buyout find investments?
- The S&P 500.
- Assume that the market risk inherent in a portfolio of buyout funds is equivalent to having a beta of 1.2
How are the expected returns for buyout funds going to be?
- expected to be lower than the past (buyout earnings yields are relatively low today)
- buyout fundraising has been substantial over the last five year and the higher fundraising has been associated with lower subsequent returns
- probably buyout firms will now be still able to outperform the S&P 500, they have been able to do so the last 25 years.
Have buyout funds historically outperformed public market indices?
Yes, even more recently. The remains true even after making reasonable adjustments for leverage (beta).
What is the relation of a fund’s track record to capital flows into individual GPs and the overall GP survival?
- fund flows are positively related to past performance
What happens in boom times of the PE industry?
- new partnerships are more likely to be started in periods after the industry has performed especially well.
- funds that were started boom times, however, are less likely to raise follow-on funds.
Which factors make it difficult for new funds to compete with existing funds and what explains the heterogeneity in performance of the existing funds?
- many practitioners assert that private equity investors have proprietary access to particular transactions. (Better GPs may be able to invest in better investments)
- Good GPs provide better management or advisory input
- better VCs get better deal terms (e.g. lower valuations) when negotiating with startups because the startup accepts these terms for getting superior management, advisory, or repetitional inputs.
TVPI
cumulative total value to paid-in capital
DPI
distributed total value to paid-in capital
When does performance of PE increase in the cross-section?
- performance increases with the GP’s experience and decreases with funds size (concave relation to size)
- GP’s track record is positively related to the GP’s ability to attract capital into new funds.
Would a successful GP chose to grow the fund?
- not necessarily because GPs might not easily scale up investments by putting more money in any particular deal or investing in more companies because other inputs such as time and advice are more important.
- could be difficult to hire partners of the same quality as the existing partners
- number of good startups in the economy is limited at each point in time.
PIPOs
private IPO transactions
What do managers do so that a company becomes a unicorn? (Unicorn is good for the company for PR reasons etc.)
At some companies managers manipulate the market valuation by acquiescing (hinnehmen) to complicated and onerous (mühsam) financing conditions from VC firms that enable them to attract a sufficient amount of new capital.
How is the value of a start-up boosted?
In exchange for receiving terms that eliminate much of their downside risk, the participants in this new funding round may be wiling to accept higher valuations than would be justified by the fundamental economic activity of the firm.
What are the disadvantages of complex financing terms?
- complications for the firm to raise additional capital in further rounds
- potential investors in subsequent funding rounds will pressure the firm to offer them similar or even more favorable terms than those provided to earlier investors.
What is the advantage of complex financing terms?
- most cost-effective way for the firm to raise capital as long as the value of the new venture continues to increase
What is a ratchet? = Anti-Dilution Provision
- adjusts the conversion ratio from preferred stock to common stock and provides additional share to the investor if certain pricing benchmarks in the IPO are not achieved.
- protect investors against share price declines that occur during subsequent fundraising rounds or an IPO
What is a drawback of a ratchet for the venture?
- because the ratchet provides a return guarantee the ratchet moves some investors which have a ratchet to want the venture to sell less than the anticipated IPO value
Primary documents that determine the structure of VC investments?
term sheet and the definitive agreements.
term sheets
non-binding agreements between the investors and the company that mark the formalization of negotiations.
- provide an outline of the major terms that will be incorporated into the definitive agreements
definitive agreements
final contracts that govern the terms and conditions that legally bind the company and the investors in a VC transaction
- specification of the securities
