thats a link for the qs : file:///C:/Users/L/Downloads/l09_-_private_equity_practice_problems.pdf

1. Jo Ann Ng is a senior analyst at SING INVEST, a large regional mid-market buyout manager in Singapore. She is considering the exit possibilities for an existing investment in a mature automotive parts manufacturer that was acquired 3 years ago at a multiple of 7.5 times EBITDA. SING INVEST originally anticipated exiting its investment in China Auto Parts, Inc. within 3 to 6 years. Ng noted that current market conditions have deteriorated and that companies operating in a similar business trade at an average multiple of 5.5 times EBITDA. She deemed, however, based on analyst reports and industry knowledge that the market is expected to recover strongly within the next two years because of the fast increasing demand for cars in emerging markets. Upon review of market opportunities, Ng also noted that China Gear Box, Inc., a smaller Chinese auto parts manufacturer presenting potential strong synergies with China Auto Parts, Inc., is available for sale at an EBITDA multiple of 4.5. Exits by means of an IPO or a trade sale to a financial or strategic (company) buyer are possible in China. How would you advise Ng to enhance value upon exit of China Auto Parts? 2. Wenda Lee, CFA, is a portfolio manager at a UK-based private equity institutional investor. She is considering an investment in a mid-market European buyout fund to achieve a better diversification of her firms existing private equity portfolio. She short listed two funds that she deemed to have a similar risk return profile. Before deciding which one to invest in, she is carefully reviewing and comparing the terms of each fund. Based on the analysis of terms, which fund would you recommend to Lee? 3. Jean Pierre Dupont is the CIO of a French pension fund allocating a substantial portion of its assets to private equity. The existing private equity portfolio comprises mainly large buyout funds, mezzanine funds, and a limited allocation to a special situations fund. The pension fund decided to further increase its allocation to European venture capital. The investment committee of the pension fund requested Dupont present an analysis of five key investment characteristics specific to venture capital relative to buyout investing. Can you assist Dupont in this request? 4. Discuss the ways that private equity funds can create value. 5. What problems are encountered when using comparable publicly traded companies to value private acquisition targets? 6. What are the main ways in which the performance of private equity limited partnerships can be measured A) during the life of the fund, and B) once all investments have been exited? The following information relates to Questions 712 Martha Brady is the chief investment officer (CIO) of the Upper Darby County (UDC) public employees pension system. Brady is considering an allocation of a portion of the pension systems assets to private equity. She has asked two of her analysts, Jennifer Chau, CFA, and Matthew Hermansky, to provide more information about the workings of the private equity market. Brady recognizes that the private equity asset class covers a broad spectrum of equity investments that are not traded in public markets. She asks Chau to describe the major differences between assets that constitute this asset class. Chau notes that the private equity class ranges from venture capital financing of early stage companies to complete buyouts of large publicly traded or even privately held companies. Chau describes some of the characteristics of venture capital and buyout investments. Chau mentions that private equity firms take care to align the economic interests of the managers of the investments they control with the interests of the private equity firms. Various contractual clauses are inserted in the compensation contracts of the management team in order to reward or punish managers who do not meet agreed on target objectives. One concern is the illiquidity of private equity investments over time. But some funds are returned to investors over the life of the fund because a number of investment opportunities are exited early. A number of provisions describe the distribution of returns to investors, some of which favor the limited partners. One such provision is the distribution waterfall mechanism that provides distributions to limited partners (LP) before the general partner (GP) receives the carried interest. This distribution mechanism is called the total return waterfall. Chau prepares the following data to illustrate the distribution waterfall mechanism and the funds provided to limited partners when a private equity fund with a zero hurdle rate exits from its first three projects during a three-year period. Chau cautions that investors must understand the terminology used to describe the performance of private equity funds. Interpretation of performance numbers should be made with the awareness that much of the fund assets are illiquid during a substantial part of the funds life. She provides the latest data in Exhibit 2 for Alpha, Beta, and Gamma Fundsdiversified hightechnology venture capital funds formed five years ago and each with five years remaining to termination. Chau studies the data and comments: Of the three funds, the Alpha Fund has the best chance to outperform over the remaining life. First, because the management has earned such a relatively high residual value on capital and will be able to earn a high return on the remaining funds called down. At termination, the RVPI will earn double the 0.65 value when the rest of the funds are called down. Second, its cash on cash return as measured by DPI is already as high as that of the Beta Fund. PIC, or paid-in capital, provides information about the proportion of capital called by the GP. The PIC of Alpha is relatively low relative to Beta and Gamma. Hermansky notes that a private equity funds ability to properly plan and execute its exit from an investment is vital for the funds success. Venture funds such as Alpha, Beta, and Gamma take special care to plan for exiting from investments. Venture funds tend to focus on certain types of exits, especially when equity markets are strong. Brady then asks the analysts what procedures private equity firms would use to value investments in their portfolios as well as any other investments that might be added to the portfolio. She is concerned about buying into a fund with existing assets that do not have public market prices to ascertain value. In such cases, the GP may overvalue the assets and new investors in the fund will pay a higher NAV for the fund assets than they are worth. Hermansky makes three statements regarding the valuation methods used in private equity transactions during the early stages of selling a fund to investors. Statement 1 For venture capital investment in the early stages of analysis, emphasis is placed on the discounted cash flow approach to valuation. Statement 2 For buyout investments, income-based approaches are used frequently as a primary method of valuation. Statement 3 If a comparable group of companies exist, multiples of revenues or earnings are used frequently to derive a value for venture capital investments. 7. The characteristic that is most likely common to both the venture capital and buyout private equity investment is: A. measurable and assessable risk. B. the extensive use of financial leverage. C. the strength of the individual track record and ability of members of management. 8. The contractual term enabling management of the private equity controlled company to be rewarded with increased equity ownership as a result of meeting performance targets is called: A. a ratchet. B. the tag-along right. C. the clawback provision. 9. For the projects described in Exhibit 1, under a deal-by-deal method with a clawback provision and true-up every three years, the cumulative dollar amount the GP receives by the end of the three years is equal to: A. one million. B. two million. C. three million. 10. Are Chaus two reasons for interpreting Alpha Fund as the best performing fund over the remaining life correct? A. No. B. Yes. C. The first reason is correct, but the second reason is incorrect. 11. The exit route for a venture capital investment is least likely to be in the form of a(n): A. initial public offering (IPO). B. sale to other venture funds targeting the same sector. C. buyout by the management of the venture investment. 12. Which statement by Hermansky is the least valid? A. Statement 1. B. Statement 2. C. Statement 3.