Private Equity Flashcards

Question

What is a preferred return?

Answer 1

The preferred return, or "hurdle rate", is basically a minimum annual return that the LP is entitled to before the GP may begin receiving carried interest. If there is a hurdle, the rate is typically around 8%. While the preferred return of 8 - 10% is meant to compensate the investors for the longer term hold and iliquidity of the investment, good PE firms that are able to continually raise funds are expected to deliver returns in excess of 20%.

Answer 2

Carried interest is the general partner's share of the profits. It can range from 5-30% of the profits.

Answer 3

The clawback provision gives the LP's the right to reclaim a portion of the GP's carried interest in the event that losses from later investments cause the GP to withhold too much carried interest.

Answer 4

Joint Venture (JV Partner) A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.

Answer 5

Capitalization Rate: A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor's potential return on his or her investment. Capitalization Rate = Yearly Income --------------------- Total Value For example, if Kevyn buys a property that will generate $125,000 per year and he pays $900,000 for it, the cap rate is: 125,000/900,000 = 13.89%. What if the property's value rises to $2 million two years later? Now the cap rate is a less favorable 125,000/2 million = 6.25%. This is because Kevyn could potentially sell the property for $2 million and use that money for an alternative investment.

Answer 6

Class A : properties are luxury units. They are usually less than 10 years old and are often new, upscale apartment buildings. White-collar workers live in them and are usually renters by choice. ``` Class B: can be 10 to 25 years old. Generally well maintained and have a middle class tenant base of both white and blue-collar workers. Some are renters by choice, and others by necessity. ``` Class C: built within the last 30 to 40 years. They generally have blue-collar and low- to moderate-income tenants, and the rents are below market. This is where you'll find many tenants that are renters "for life." Class D: properties are where you'll find many Section 8 in the U.S. or government-subsidized housing tenants.

Answer 7

A form of financing that is part debt and part equity typically used to finance the expansion of existing companies. - Basically debt capital that gives the lender warrants/option rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. - Generally subordinated to senior debt lenders such as banks and venture capital companies. Mezzanine financing is usually provided to the borrower very quickly with little due diligence on the part of the lender and little or no collateral on the part of the borrower, this type of financing is aggressively priced with the lender seeking a return in the 20-30% range.

Answer 8

A rate of return often used in real estate transactions. The calculation determines the cash income on the cash invested. Calculated as: Annual Dollar Income COC = ---------------------------------- Total Dollar Investment For example when you purchase a rental property, you might put down only 10% for a cash down payment. Cash-on-cash return would measure the annual return you made on the property in relation to the down payment.

Answer 9

Holds the shares of many private partnerships that invest in private equities. It provides a way for firms to increase cost effectiveness and thereby reduce their minimum investment requirement. This can also mean greater diversification, since a fund of funds might invest in hundreds of companies representing many different phases of venture capital and industry sectors. Ex: DPG

Answer 10

Exchange-Traded Fund You can purchase shares of an exchange-traded fund (ETF) that tracks an index of publicly traded companies that invest in private equities. Since you are buying individual shares over the stock exchange, you don't have to worry about minimum investment requirements.

Answer 11

Special-Purpose Acquisition Companies A publicly-traded buyout company that raises money in order to pursue the acquisition of an existing company. SPACs raise blind pool money (most of which goes into a trust) from the public for an unspecified merger, sometimes in a targeted industry. Each SPAC is typically sold at $6 per unit for one share of common stock (to be publicly-traded in the future) and two warrants that can purchase additional shares. If an acquisition is not made in two years, the money is returned to the original investors. Also known as a "targeted acquisition company (TAC)".

Answer 12

Limited Partners(LP): - Usually institutional or high net worth investors interested in receiving capital gains associated with investing. - Do NOT take part in the fund's active management. - Protected from losses beyond their original investment as well as any legal actions taken against the fund. General Partners(GP) - Responsible for managing the investments within the private equity fund. - For their services, they earn a management fee and a percentage of the fund's profits, called carried interest. - They CAN be legally liable for the actions of the fund.

Answer 13

Money that is committed by LPs to a private equity fund that is usually not invested immediately. It is "drawn down" and invested over time as investments are identified.

Answer 14

Drawdowns (Capital Calls) -issued to LP's when the GP's has identified a new investment and a portion of the LP's committed capital is required to pay for that investment.

Answer 15

The first year that the PE fund draws down or "calls" committed capital.

Answer 16

- The cumulative amount of capital that has been drawn down. Also know as contributed capital. ( Invested capital is the amount of paid-in capital that has actually been invested into the fund's portfolio companies)

Answer 17

The total amount of cash and stock that has been paid out to the limited partners

Answer 18

Residual value is the market value of the remaining equity that the limited partners have in the fund.

Answer 19

The total value to paid-in (TVPI) multiple (Cumulative Distributions + Residual Value) Investment Multiple = ---------------------------------------------------- Paid-In Capital It gives a potential investor insight into the fund's performance by showing the fund's total value as a multiple of its cost basis. It does not take into account the time value of money.

Answer 20

Cumulative Distribuions Realization Multiple = ------------------------------- Paid-In Capital The realization multiple, in conjunction with the investment multiple, gives a potential private equity investor insight into how much of the fund's return has actually been "realized", or paid out, to investors.

Answer 21

Residual Value RVPI Multiple = ----------------------- Paid-In Capital Provides a measurement, in conjunction with the investment multiple, of how much of the fund's return is unrealized and dependent on the market value of its investments.

Answer 22

PIC Multiple = Paid-In Capital -------------------------- Commission Capital This ratio shows a potential investor the percentage of a fund's committed capital that has actually been drawn down.

Answer 23

A management buyout (MBO) - A transaction where a company’s management team purchases the assets and operations of the business they manage. A management buyout (MBO) is appealing to professional managers because of the greater potential rewards from being owners of the business rather than employees.

Answer 24

A management buy-in (MBI) Different than an MBO in which an external management team acquires a company and replaces the existing management team.

Answer 25

A leveraged management buyout (LMBO) where the buyers use the company assets as collateral to obtain debt financing.

Answer 26

Leverage Buyout(LBO)- The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

Answer 27

Leverage is the ratio of a company's loan capital (debt) to the value of its common stock. " By utilizing leverage up to 50%, which is feasible in this market, the yield rises to a level that is attractive to opportunity investors."

Answer 28

Metropolitan Statistical Area "Used in the Atlanta MSA as equity..."

Answer 29

A person who guarantees to pay for someone else's debt if he or she should default on a loan obligation. A guarantor acts as a co-signor of sorts, in that they pledge their own assets or services if a situation arises in which the original debtor cannot perform their obligations.

Answer 30

"Real estate owned" ``` REO is a class of property owned by a lender—typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction.T his is commonly the case when the amount owed on the home is higher than the current market value of this foreclosure property ```

Answer 31

Close of escrow means essentially that a real estate transaction has been completed and that the sale is final. An 'escrow' is a common feature of standard real estate transactions. They function as an independent third party that holds all monetary funds and documents until the close of the sale.

Answer 32

Single Family Residence.

Answer 33

A basis point: a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. In most cases, it refers to changes in interest rates and bond yields. For example, if the Federal Reserve Board raises interest rates by 25 basis points, it means that rates have risen by 0.25% percentage points. If rates were at 2.50%, and the Fed raised them by 0.25%, or 25 basis points, the new interest rate would be 2.75%. I

Answer 34

An earnout is a financing arrangement for the purchase of a business in which the seller finances a portion of the purchase price, and payment of this amount is contingent on achieving a predetermined level of future earnings. An earnout will typically range between 10% to 50% of the total purchase price, and will usually not extend past three years. Ex: Say a seller has a valuation expectation of $15 million, but the buyer thinks a purchase price of $12 million is more appropriate. The gap of $3 million might be bridged by an earnout. The seller could get paid $1 million per year.

Answer 35

An international trade instrument; non circumvention/non disclosure agreement used in the preliminary stages of a business transaction where the Seller and Buyer do not know each other, but are brought into contact with each other by one or more intermediaries (also known as brokers or middlemen), to fulfill the transaction.

Answer 36

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC) * a public government- sponsored enterprise (GSE) * created to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage- backed security to investors on the open market. Fannie Mae The Federal National Mortgage Association (FNMA), * established to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing. * created a liquid secondary mortgage market and thereby made it possible for banks and other loan originators to issue more housing loans, primarily by buying Federal Housing Administration (FHA) insured mortgages

Answer 37

Lauren Allen Wyckoff aka White Chocolate Bunny

Answer 38

Also referred to as Senior Loans - Debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer. - Senior debt has greater seniority in the issuer's capital structure than subordinated debt. - In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment.

Answer 39

Mergers and Acquisitions

Answer 40

Sources and Uses: - Provides a summary of where the capital used to fund an acquisition will come from (the sources), what this capital will purchase (the uses). - The sources and the uses must equal each other, and they must total the total purchase price plus transaction costs. ``` Typical sources of capital include: – Bank debt – Vendor financing(VTBorearnout) – Mezzanine debt – Earnouts;and/or – Equity ``` ``` Typical uses of capital include: – Capital assets – Working capital – Goodwill;and/or – Transaction costs ```

Answer 41

1. Bond Lease 2. NNN Lease 3. NN Lease 4. Modified Net (or Modified Gross) Lease

Answer 42

The tenant is fully responsible for operating expenses, maintenance, repairs, and replacements for the entire building and site, without limitation.

Answer 43

These leases follow the bond lease definition except that capital expenditures are limited, usually in the final months of the lease. A triple net lease (Net-Net-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay the three "Nets" : - real estate taxes - building insurance - and maintenance on the property in addition to any normal fees that are expected under the agreement (rent, utilities, etc.).

Answer 44

This lease follows the NNN, except the landlord is responsible for structural components, such as the roof, bearing walls, and foundation.

Answer 45

The tenant pays its own utilities, interior maintenance and repairs, and insurance. The landlord pays everything else, including real estate property taxes.

Answer 46

Objective may be: - Relief from management obligations, - Assured income, - Pride of ownership, - Preservation of capital.

Answer 47

1. The Inflation Trap | 2. Taxation burden

Answer 48

- A fund established by an employer to facilitate and organize the investment of employees' retirement funds contributed by the employer and employees. - The pension fund is a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years

Answer 49

- Family offices are private wealth management advisory firms that serve ultra-high net worth investors. - Family offices are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of a affluent individual or family. (For example, many family offices offer budgeting, insurance, charitable giving, family-owned businesses, wealth transfer and tax services.) - There are two types of family offices, single family offices and multi-family offices sometimes referred to as MFOs.

Answer 50

- Money that is invested in a firm by its owner(s) or holder(s) of common stock (ordinary shares) but which is not returned in the normal course of the business. - Investors recover it only when they sell their shareholdings to other investors, or when the assets of the firm are liquidated and proceeds distributed among them after satisfying the firm's obligations. Also called "equity contribution."

Answer 51

Exhibitor: a person who displays works of art or other items of interest at an exhibition.

Answer 52

Print and Advertising

Answer 53

a person whose work provides necessary support to the primary activities of an organization, institution, or industry: the employment of specialist teachers and ancillaries.

Answer 54

Financial Industry Regulatory Authority (FINRA) - FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry. - FINRA is not part of the government. They are an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.

Answer 55

Inflation can mean: - an increase in the money supply - or an increase in price levels. Generally, when we hear about inflation, we are hearing about a rise in prices compared to some benchmark. If the money supply has been increased, this will usually manifest itself in higher price levels - it is simply a matter of time.

Answer 56

Gross Domestic Product In the United States GDP represents the total aggregate output of the U.S. economy. - It is important to keep in mind that the GDP figures as reported to investors are already adjusted for inflation. - In other words, if the gross GDP was calculated to be 6% higher than the previous year, but inflation measured 2% over the same period, GDP growth would be reported as 4%, or the net growth over the period.

Answer 57

An index is a statistical measure of the changes in a portfolio of the stick representing a portion of the overall market

Answer 58

Trailing Twelve Months (TTM) The Trailing Twelve Months (TTM) refers to the last 12 month period for a selected financial metric such as revenue, earnings, or EBITDA. For example, the TTM revenue of a company for the month of May would include the revenue from June of the prior year to May of the current year. The trailing twelve months is also sometimes referred to as the Last Twelve Months (LTM).

Answer 59

Debtor In Possession (DIP) Financing arranged by a company while under the Chapter 11 bankruptcy process. DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims. An individual or corporation that has filed for Chapter 11 bankruptcy protection and remains in control of property that a creditor has a lien against, or retains the power to operate a business. A debtor who files a Chapter 11 bankruptcy case becomes the debtor in possession (DIP). The DIP continues to run the business and has the powers and obligation of a trustee to operate in the best interest of any creditors. A DIP can operate in the ordinary course of business, but is required to seek court approval for any actions that fall outside of the scope of regular business activities. The DIP must also keep precise financial records and file appropriate tax returns.

Answer 60

The yield paid by a fixed income security. A fixed income security's coupon rate is simply just the annual coupon payments paid by the issuer relative to the bond's face or par value. The coupon rate is the yield the bond paid on its issue date. This yield, however, will change as the value of the bond changes, thus giving the bond's yield to maturity. Face Value Coupon Rate = ____________ Bond Par Value A bond's coupon rate can be calculated by dividing the sum of the security's annual coupon payments and dividing them by the bond's par value. For example, a bond which was issued with a face value of $1000 that pays a $25 coupon semi-annually would have a coupon rate of 5%. All else held equal, bonds with higher coupon rates are more desirable for investors than those with lower coupon rates.

Answer 61

The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.

Answer 62

Multiple of Invested Capital

Answer 63

A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory. Also known as "interim financing", "gap financing" or a "swing loan".

Answer 64

Unlevered Cost Of Capital Unlevered cost of capital will be a cheaper alternative to a levered cost of capital investment, as there are higher costs associated with the issuing of debt or preferred equity. Some of these marginal costs include, but are not limited, underwriting costs, brokerage fees, and dividend and coupon payments.

Answer 65

Levered Free Cash Flow Levered free cash flow is unlevered free cash flow minus interest and mandatory principal repayments. In other words, it shows the net cash balance a company hoards after making all debt-related remittances. Investment bankers and financial commentators pay attention to levered free cash flow to see if a borrowing entity can still be economically afloat after satisfying its commitments. This observation is important to set financially moribund companies apart from organizations with a stellar credit history and economic soundness.

Answer 66

Unlevered Free Cash Flow Unlevered free cash flow is cash a company generates before paying interest. The metric equals "earnings before interest, taxes, deprecation and amortization" (EBITDA) minus capital expenditures minus changes in net working capital minus taxes. The idea is to determine how much money the organization generates on a stand-alone basis before meeting its financial commitments. Corporate leadership reviews this metric to determine how adeptly department heads are using company money, making sure they thoroughly analyze opportunities before making commercial moves.

Answer 67

The face value of a bond. Par value for a share refers to the stock value stated in the corporate charter. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. Par value for a bond is typically $1,000 or $100. A bond that is trading above par is said to be trading at a premium, while a bond trading below par is regarded as trading at a discount. During periods when interest rates are low or have been trending lower, a larger proportion of bonds will trade above par or at a premium. When interest rates are high, a larger proportion of bonds will trade at a discount. If an investor buys a taxable bond for a price above par, the premium can be amortized over the remaining life of the bond, offsetting the interest received from the bond and hence reducing the investor’s taxable income from the bond. Such premium amortization is not available for tax-free bonds purchased at a price above par.

Answer 68

The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations. In other words, it's a measure of negative cash flow. Burn rate is usually quoted in terms of cash spent per month. For example, a burn rate of 1 million would mean the company is spending 1 million per month. When the burn rate begins to exceed forecasts, or revenue fails to meet expectations, the usual recourse is to reduce the burn rate (which, in most companies, means reducing staff).

Answer 69

Mezzanine capital (or mezzanine debt) refers to unsecured, high-yield, subordinated debt or preferred stock that represents a claim on a company's assets that is only senior to that of a company's shareholders.

Answer 70

Any obligation that has precedence over another debt. (A senior or first mortgage is an example of a preferred debt.)

Answer 71

A warrant is the right but not the obligation to buy or sell a certain quantity of an underlying instrument at an agreed-upon price. The right to buy the underlying instrument is referred to as a call warrant; the right to sell it is known as a put warrant. In this way a warrant is very similar to an option. The difference is primarily that the length of time available to exercise a warrant is much longer than most option contracts. Most warrants have 5-10 years before they must be exercised or expire worthless.

Private Equity Flashcards

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