Exam 1 Flashcards
(159 cards)
1
Q
what is venture capital
A
high risk high reward early stage investing
2
Q
private equity
A
control oriented investing in mature businesses (traditionally buyouts”
3
Q
private credit
A
debt financing as an alternative to or conjunction with equity
4
Q
who are the players in investments
A
entrpreneurs, founders, companies
ventur capitlists
privat equity firms
limited partners
strategic buyers and corporate investors
5
Q
in terms of layout of investor tyes what does it look like
A
mostly buyouts then venture capital depending on the company
6
Q
what kind of industry does VCs like
A
information technology
7
Q
whats preffered equity
A
hybrid between debt and common equity used in both VC and PE
8
Q
what is convertable debt
A
loan converting into equity at a future date/even in vc context: frequently used in early start ups when pricing is diffucult and its rarelt used in PE
9
Q
what is LBOs
A
leverage buyouts
10
Q
what are leveraged buyouts
A
acquisition of a company using significant debt (vc non applicable) PE it is a primary strategy for aquiring mature cash flow companies
11
Q
stages of private investment
A
angel and seed funding - friends fam, angel investors
venture capitalists (series A, B, C)
growth equity - Pre-ipo expansion funding
leverage buyouts Pe firms aquring companies using mix of debt and equity
exits (IPO and MA and secondairies)
12
Q
what is the jay curve
A
shows the comparison of cash outlays and cash inflows through companies lifetime
13
Q
where do PE and VC get their capital from
A
PE: institutional investors (pension funds, insurers, university endowments)
VC: high net worth individuals, family officers, successful entrprenaurs
14
Q
what are limited partners
A
investors providing capital but do not anage investments primarily passive role
15
Q
what are GPs
A
General partners investmetn professionals actively managing the fund, sourcing deals, preforming due dillagence, and overseeing portfolio companies
16
Q
what is a close end fund structure
A
capital is commited up front in connection with a single fundraising even and called and deployed over time
typically formed as a limited partnership
typically ten yrs but potential extentions which has its advantages and disadvantages
17
Q
PE;VC fund structure
A
Lps commit capital->GPs deploy capital->returns flow back ti LPs
18
Q
what are key legal documents for PE and VC firms
A
LPA, side letters, subsciption agreements
19
Q
what are PE and VC firms regulatory considerations
A
PE are subject to SEC regulations, and VC have less regulatory requirments due to their investment focus
20
Q
what is SEC
A
financial regulations, guidelines, and reporting requirements enforced by the U.S. Securities and Exchange Commission (SEC)
21
Q
what are pension funds
A
savings for retirement
22
Q
why do pension funds allocate money to private equity
A
pension funds invest in private equity to potentially earn higher returns, reduce risk, and match their long-term goals.
23
Q
what are LP constraints
A
liquidity needs
regulatory loimits
impact investing mandates
benchmarks
24
Q
what the 2 and 20 model
A
a fee structure used by private equity funds to charge their investors for managing thier money is managment fee of 2% where investors pay for the funds operational costs and carried interest of 20% which is 20%(carry) of the profits from the investments reward for fund managers
25
what is a hurdle rate and who expects it
profits distributed after LPs recieve preffered return (hurdle rate), typically 8% compounded annually
26
what are catch up pauyments
catches the firm back up to crry rate usually 100% but sometimes 80%
27
why does fund size matter
Investment strategy
Lp expectations re risk vs return
magament fee size
speed of inv. cycle
28
What is CVC
corporate venture capital- direct investmants made by corporations into start ups - typucalling invest in emerging technologies or markets align with own
29
how CVC differ from traditional VC
seeks both financial returns and strategic benefics/alighnment
avestmen off the parent companies balance sheet instead of third party LPs
mor fleability for investment horizon
more interest in IP liscensing and partner as exit
30
what are strategic buyers
companies aquiring other companies to enhance their core business operations but can differ from traditional PE
31
how strategic buyers may differ from traditional PE
focus on long term integration and market expansion rather than optimizing financial returns in a set investment period
equity portion of buyout coming from corpoate balance sheet
typically absorbs company into operations
may value targets higher because of synergies
no mandary exit
32
why do start ups raise external capital: uses of funds
Uses of funds:
growth acceleration
product development
market expansion
hiring and operation
customer acquisitions
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startups use of funds for growth acceleration
scaling
34
startups use of funds for product development
R and D, manufacturing, sofware development
35
startups use of funds for market expansion
marketin, operational, regulatory hurdles
36
startups use of funds for hring operations
key talent, scaling team
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startups use of funds for CAC
Customer squisition costs - upfront capital before paycheck period
38
Why startups raise external capital
the trade off: growth v. dilution (& control and pressure and exit
39
the trade off
dilution: founders giving up equity
control: investors requiring board seats veto rights
pressure: key milestones triggering fundraising need, investors, expectation of rapid scaling and ROI
Exit: long term expectations for both investors and funders
40
as a start up goes through series stages what happens to its dilution
the dilution increases then decreases at the end seried D
41
whats bootstrapping
self funding (personal funds, company cash flows, family and friends) less dillution that way, already established trust, they dont have expirience with gathering external funds
42
who are angel investors
early stage, gih risk, smaller checks, nwont make much off it traditionally within family office, some act as advisors
43
difference between angel investors and VCs
Vcs can make larger checks and have more structured funding rounds
44
whats the difference between: debt, capital, and equity
debt is money borrowed that must be repayed on interest( no ownership % changed)
capital is the fundsgained used and reinvested into company operations
equity is the ownership of company (common/preffered stock, dividends etc)
45
determining how much to raise:
enough capital to hit next milestone
runway considerations
series to series dilution considerations
46
Determining how much to raise: enough capital to hit next milestone
new product launch, first revenues, breakeven points, next funding series
47
Determining how much to raise:
runway considerations
24 months good rule of thumb:
likely to expectr 12-24 months watch for signals and consequences of buring too fast or too slow
48
Determining how much to raise
series to series dilution considerations
enough equity:
for lead investors to make it worth
to translate into meaningful check size
49
what to watch out with angel investors
inseasoned angel investors could ask for too much % of company
50
what are negative effects of raising funds above what they need
capital is just sitting and not being profited from unsatified investors: reputation decreases, loss of dicipline, show irresponsabilit, shows bad managing of cashflows
51
how do you calculate how much cusion there will be needed
projected cash expected to burn till next milestone (*months)+ (4-6months ) and that expectation but then subtract the projected regular spending in whats expected
52
53
why is a cusion needed when projecting needed raised funds
fundraising can take longer than expected
unexpected expenses/market changes
54
fundraising process
1. networking
2. pitch
3. term sheets
4. signing
5. due dilligence through 2-6
6. closing
55
what do investors want to see during a pitch
1. team info- capabilities/reliabilities
2. market oppourtunity (comp advantage?)
3. traction and growth (proof?)
4. Business model (how will it become profitable/scalable?)
56
what do investors want doing term sheets and negotiation section
financial clarification (valuation, overniship, % of company being sold)
control (board seats, protective provisions)
liquidation process (who gets paid first if company sells)
57
what happens during further negotiation and due dilligence in fundraising process
ongoing due dilligence (comercial, legal etc)
lecal documentation
sighing docs
58
who is a lead investor
primary investor- sets the terma and commits largest check, signal to other iveestors, negotiating leverage/coordination deal structuring
59
who are sydicates
group of investors investing together in a single fund round (her mentality, coordination issues, more stakeholders)
60
findraising timeline
often 3-6 months between formal meeting and closing for vc deals
61
what can cause dilays in fundraising time line
investor bottlenecks
due dilligence issues
negotiation stalemantes
founder fatigue
market conditions
62
How do you manage managing investor relationship during fundraising
avoid dead end conversations, investor fishing expeditions
build fomo
keep other/back up investors warm( updates etc)
regular communication
63
Due dillagence what is TAM, SAM, and SOM
TAM- what is the size of reachable markets
SAM-Is the segments that are accessable that company can target with its product
SOM- the amount of the segment that is acreually attainable in a short time/captyure
64
what are some ref glags in uncovered during due dillagence
dishonestly, inconsistant numbers, founders dispute, weak market potential or alignment with investor mandate
65
what is growth equity
between VC and PE, typically minority investments in companies with proven revenues but needing capitsl to grow organically or non , less risky but lacks control gain
66
difference between late stage VC and growth equity
late stage VC is for series B+
growth equity typically thought as non control equity investment be PE fund
67
why do companies seek growth equity
capital without burdon of of senior secured debt from traditional commercial lenders.
fund strategic intitiatives
partial sounder liquidity, capital structure restructuring
oppourtunity to leverage invester enterprise
alternative to IPO or full buyout
68
what do growth equity investords look for
founder/entreprenaur owned companies
substsntial growth
ebitda positive
limited leverage
market leding potential
proven scalable business
unique product
69
what is leverage
the use of borrowed funds or debt to increase the potential return on an investment.
70
why is growth equity mostly relationship based
longer cycle for sourcing to closing
growth equity follow promising companoes
roles rversed investors sometimes need to convince a company to take investment
who they are dealing with is more slective about taking external capital
71
what is examples of equity
common stock
contingent equity
72
what are hybrid instruments
preffered stock
convertable notes
mexxanine debt
73
examples of debt
subordinate/ unsecured debt
senior secured debt
74
how capital structures impact financial flexability and risk
too much debt financing--> cash flow strain
too much third party financing- excess dilution
structured hybrid instruments--> can balance risk and return
75
differece between majority and minority investors
rights
anti dilution
tag along rights
drag along rights
governance
76
types of buyouts
Management But out
management buy in
institutional buy out
public to private
secondary buyout
carve out
77
what is MBO
Managment butout: existing firm management team leads the buyout
78
what is MBI
managment Buy-in: external management team replaces current one
79
what it IBO
institutional butout: PE firm rather than management takes control
80
what is P2P
public to private: De listing public company though sal to one or more private buyers
81
what is secondary buyout
sale to another PE firm
82
what is carve out
aquisition of a division of a company`
83
charactersistics of buyout targets
steady cash flows
untapped efficency gains
ability to support debt financing
management teams (flexible)
84
capital structure for buyouts
relied on debt comprising of capital less than a PE firm would require upfront
buyouts favor indistries with credit friendly aspects like consistant reoocuring rev and minimal cyclicality
85
junior vs seniore debt layers
senior debt: costs less but required collateral; junior debt more flexable but costs more in terms of interest
86
what is the downside of taking on debt
strategic running company day by day, pay down the debt and also if comoany is going into more debt negative feedback loop
87
positives of taking on debt
growth and more time and a cushion
88
importance of cash flow stability in leveraged companies
ensured debt servicability(interest and principle payments)
BOs and Lenders will pay attention to ICR (interest coverage ration)
89
LBO: leverage buyout
large investment into competny withdebt and private equity that builds upto se sell it
90
what are risks and challenges to buyouts
Over leverage
macroeconomic cycles
operational risks
regulatory and reputational risks
inegration challenges
91
value creation in but=youts
revenue growth strategies
operational improvments
financial engineering
92
Value creation in buyouts: revenue growth strategies
geographic expansion
product diversification
add ons
93
exiting and buyout investment
sale to a strategic buyer(another company)
secondary buyout(PE firm)
IPO
Recapitalization
94
why do alternative strategies exist
broader set of investment oppourtunities
investor diversification
risk return trade offs
95
type of buyout alternative strategies
Distressed PE
Real assets
Private credit
96
what is distressed PE
an alternative strategy- aquiring an underpreformer or financially troubled copanies and reconstructing them
97
what is example of real asset ivesting
Real estate
infastructure
natural rescources
98
what is Private credit
PE alternative strategies providing debt financing to companies as an alternative to traditional bank loands
99
ways to do distressed private equity
Turnaround investing
distressed debt investingw
100
what is turn around investing
aquiring control and fixing operations to restore profitability
101
what is distressed debt investing
is buying discounted debt with aim of gaining control
102
what are common characteristics of turn around investing targets
Revenue decline
bad cost structure
weak management
overleveraged balance sheet
103
what are key strategies for turnaround investing
operational fixes
financial reconstruction
104
consideration to be made when doing turn around investing
high risk
deep industry expertise needed
sucess is variable depending on speed and stakeholder allignment
105
why use distressed debt investing as PE firm
lower entry price
priority in capital structure
path to control
106
key execution tacticts for PE firms with distressed debt strategies
buying below par
negotiating reconstructuring
influencing bankruptsy outcomes
107
why PE invests in real assets
long term cash flow and yield
inflation hedge and diversification
lower correlation to trad equity markets
108
Real estate PE stats
Core
value add
opportunistic
109
PE vs trad real estate investing
more financial e engineering and leverage
shorter investment horizons
110
infatructure investing types
transportation
utilities
telecom and digital infustracture
111
why do LPs like infastructure investments
predictable ash flows
lower volatility vs trad equities
inflation adjusted revenue models
112
natural recourse investing key factors/sectors
oil and gas
mining and metals
agriculture and timer
113
characteristics of Natural rescource investing
countercyclical returns (price rise with inflation)
supply chain control
but price control is less, regulatory challenge, envuronmental concern
114
what is private crdit
debt financing provided by non bankers, (PE firms, credit frunds, and aternative asset managers) because after 2008 recesion banks reduced corporate lending
115
pros of private credit
more flexible structuring
higher interest rates
les regulatory oversight
less equity dilution
116
key strategies in private credit
direct lending
subordinate capital
oppourtunistic credit investing
speciality financing
117
what is deal sourcing and the tyoes
it is the process of finding, identifying and screening investment oppourtunities (proprietary and intermediate sourcing)
118
what is proprietary sourceing
direct outreach and relationship based on industry ecperties and networks: usually one to one duscussion/;long termrelationship building
119
what is intermediated sourc
deals made through investment banks and brokers: usually involces a competiative process for potential investors
120
advantage/disadvantage of proprietary sourcing
negotiation
time
banker/managment fees avoided
but
lower prices
due dillegence takes longer
121
advantages/disadvantages of intermediated sourcing
having multiple bids can have higher sale price
prefessional representation
business disruption decreased
could be rushed or high pressure
banker fees
122
competative advantage in deal sourcing
scarcity of high quality deals + strong network effects and brand reputation
123
screenign and initial eval
mandate alignment
public rescources
initial management calls
teasers
filerting unatractive deals
124
what is the purpose of due dilligence
confirm viability of the deal
risk ID and mitigation
price justification
investment structuring
125
prelimerary due dilligence process objective
quickly assess deal viability before commitments
high level review between internal teamd
126
due dilligence process preliminary
initial data review
management calls
market and competative landscape check
prreliminary valuation analysis
early red flaf ID
127
what is the objectives of due dilligence deep dive
fully validate the investment thesis and uncover the risk before finalizing the deal (comprehensive analysis/justify internally and for external stakeholders)
128
what is the process to due dillagence deep dive
financial DD
Commerical DD
Legal DD
Operational DD
129
dd abr
F
C/S
L
O
130
what is comercials/strategic dd
its an industrry deep dive on growth rates, competative pressures, regulatory impact
customer and supplyer analysis
market positioning, branding, pricing power
131
what is financial DD
Looking into historic financials
quality of earnings
working capital and liquidity analyusis
debt obligations and off blance sheet obligations
132
whats legal DD
corporate structur and ownership rights
pending litigation/ regulatory risks
supplier agreements, employee contacts, lease
133
what is valuation in vc and PE
it is the predicting of the worth of business endeavors and company worth in the context of investment
134
he valuation toolkit
business plan(projections of company and operations efficiency growth)
scenario analysis
135
what are the different types of scenario analysis range
base case
downside case
upside case
(all mus have reasonable assumptions and be realistic)
136
What is TEV
total enterprise value
137
what is total enterprise value
the toal value of a company including both ewuity and debt
138
what is net debt
the value of all short and ling term debt minus the value of excess cash
139
EV
equity value
140
how do you get enterprise value
subtract net debt from TEV
141
how does debt and cash effect EV
debt reduces equity value but cash reduces net debt amount
142
How do be genrate projections from
profit based multiples and cash being generated
143
different mutiples based valuation
market comparables
comparable/precedent transactions
ebidta multiples (most common)
144
valuation industry specific multiples
capital intensive (higher depreciation costs) vs asset light businesses (strong margins and growth potential)
145
DCF inputs
cash flow projections, discount rate, terminal value
146
FCF
free cash flow discounting them to present value
147
WACC
weighted average cost of capital (projected cash that is then discounted to present value of the dollar (the higher means that cash flows is percieved to be less discounted and dollar)
148
VC valuation appoach types
pre money
post money
they set high target IRRs
149
Implied valuation today
expected exit value/ (1+target IRR)^ years
150
challenges of VC valuation method
large discount rates and difficult assumptions, low amount of data, unpredictable market,
151
what is a cap table
a detailed breakdown of ownership in a company
152
importants of a cap table
financial transparancy
helps investors understasnd ownership structure
crit for negotiations
153
what are the three methods to vc to project equity ownership values
Pre money method
percentage of ownership method
dollars invested method
154
pre money method for equity valuation
Conversion price determined by dividing pre-money valuation by fully diluted shares outstanding
155
Percentage-Ownership Method
Investors’ ownership percentage fixed before financing
* Conversion price adjusts to maintain new investors’ ownership percentage post-investment
156
Percentage-Ownership Method
Algebraically solving for price first: Series A price per share = X
157
pre money eval equation
post money valuation- invested amount
158
percentage ownership method equation
investment amount/post money valuation*100
159
dollars invested method equation
investment amount/ownership percentage desired
