Private Equity

Question 1

IIRR

Answer 1

IIRR - estimate of performance before fund liquidation, includes NAV, which IRR does not.
Pooled IIRR - all cash flows in the portfolio
Commitment weighted IIRR - weighted by investments.

Question 2

MIRR, IRR

Answer 2

MIRR - Gives more control over the assumed reinvestment rate from future cash flows. Needs reinvestment rate for each cash flow. CAN BE APPLIED TO BOTH IRR AND IIRR
IRR - assumes cash flows are reinvested at the IRR it’s self.

Question 3

IPO market

Answer 3

Healthy means manager can accelerate investment returns - can liquidate portfolio more easily.

Question 4

Performance Persistance

Answer 4

Reasonable for both weak and strong performers. 42% chance of strong performer doing the same again - similar chance of a weak performer.

Question 5

CFaR - Valuation

Answer 5

CFAR can be used with buy and sell approach with short time series of NAVs following a J curve. Ignores commitment risk.

Question 6

Team quality

Answer 6

Established - top quartile for most funds in at least 2 business cycles.
Blue chip - top quartile in all funds for 2 business cycles.
Re-emerging - Former blue chip team that didn’t top quartile but has reorganised

Question 7

VC funds

Answer 7

Overdiversification can lead to fading fund quality. 20 max no of funds.
Limited syndication - get follow on financing.

Question 8

Exculpation

Answer 8

Fees someone from blame in the PPM.

Question 9

Dollar cost averaging

Answer 9

Managing risk and return: commits same amount each year regardless of market conditions. Antithesis of market timing

Question 10

Bailey Criteria

Answer 10

Best practice for establishing a PE benchmark. 7 factors: knowable, investable, measurability, specified, appropriate, owned and reflective of current investment opinion

Question 11

Investment period

Answer 11

3-5 years is investment period.
Build and harvest - best performance.
Decline or exit - consistent but not top performer

Question 12

Benchmarks

Answer 12

Peer group - does not suffer from survivorship bias, as it’s custom made by the investor

Question 13

Bottom up investing

Answer 13

Screens all opportunities in targeted markets. Risk of becoming too concentrated in specific sectors.

Question 14

Laddering to ensure adequate liquidity

Answer 14

Difficult to predict capital calls and cash returns, although can be predicted to a certain extent

Question 15

VC fund stages

Answer 15

Early stage: seed (before company set up) then start up (when further financing is provided.
Expansion stage: when it’s established, also called development capital stage.