Q1. Are private equity firms financial buyers or strategic buyers and why? Which type of buyer should generally be able to pay more in an M&A auction and why? Why might that not always be the case? 

Q2. Provide two examples: one of a publicly traded company that would be a good LBO target, and one that would not be an ideal candidate. Explain your choices. 

Q3. What type of management is generally needed to run a portfolio company owned by a private equity firm (describe the characteristics of these managers)? 

Q4. What are the five principal financing sources for an LBO transaction? 

Q5. How is the commitment and redemption of capital different in private equity compared to hedge funds? 

Q6. Why would a proposal to eliminate the tax benefits of carried interest (performance fees) have a greater impact on the private equity industry? 

Q7. Why are general partners typically only allowed to make investments in new companies during the first five years of a fund's life? 

Q8. Suppose a private equity fund has $100 million in committed capital and its base rate for management fees is 2%. The fund invested in 10 companies during the first 5 years and begins to exit its investments in year 6 at a pace of two exits per year until the end of year 10, when all investments have been exited. Assume the original cost basis for each investment is $10 million. Also assume fees calculated on net invested capital is based on year-end balances. How much in lifetime management fees does the firm earn, based on each of the four methods described in Exhibit 16.2?

 Q9. What type of concessions were private equity firms able to get from investment banks during 2006 and the first half of 2007 that normally would not be possible? 

Q10. Describe the benefits and challenges of club transactions.

 Q11. When a private equity fund teams up with management for a potential buyout, why would they want to avoid having early disclosure of the transaction? Q

12. Why do you think more companies don't recapitalize their balance sheets by adding more debt in order to replicate the returns achieved by private equity fund portfolio companies? Do investment banks ever recommend a leveraged recapitalization of public companies? Why or why not? 

Q13. Since private equity firms seek to minimize their equity contribution in a deal in order to maximize returns, the amount of debt used to finance transactions should (wishing away financial risk) be the maximum amount of leverage for the companythat debt providers will accept. Why then, are these companies allowed to take on even more debt for leveraged recapitalizations?