Reading 48: Private Equity Valuation- LOS g～ Q1-3

following, net, limited, private, valuation

LOS g: Explain private equity fund structures, terms, valuation, and due diligence in the context of an analysis of private equity fund returns.

Q1. Which of the following is the least likely disadvantage in calculating the net asset value (NAV) for a private equity fund?

A) The limited partners use a third party to calculate the NAV of a private equity fund.

B) Only capital commitments already drawn down are included in the NAV calculation.

C) NAV may be difficult to calculate since firm values are not known with certainty prior to exit.

Q2. The Dragonhill Group manages a $250 million private equity fund. Investors committed to a total of $300 million over the term of the fund and specified carried interest of 20% and a hurdle rate of 10%. Carried interest is distributed on a deal-by-deal basis. 60% of the $250 million has been invested at the beginning of year 1 in Deutsch Co. (Deutsch), with the remaining 40% invested in Reiner Ltd (Reiner).
Both firms are sold at the end of the third year, realizing a $45 million profit for Deutsch and a $35 million profit for Reiner.
The carried interest paid to the fund’s general partner after Deutsch and Reiner, respectively, is:

Deutsch Reiner

A) $9 million $0

B) $0 $7 million

C) $9 million $7 million

Q3. Zolan Athos and Katie Brie co-manage one of the funds of The Ceskel Group, a large private equity firm based in Canada. The fund, established in 2004, has total assets of $500 million and invests primarily in real estate firms ranging from new ventures to leveraged buyouts of larger, established companies. The fund will reopen to outside investors next year and is looking to raise an additional $250 million to make strategic investments over the next two years, after which the fund will be closed to new capital.

In one of the meetings with potential investors, Athos and Brie discuss their recommendations for investment and acquisition opportunities. When questioned by an investor on exit strategies and terminal value projections, Brie makes the following statements:

Statement 1:	One possible exit route is through an IPO. An IPO generally offers a higher potential exit value than a management buyout or liquidation.
Statement 2:	We favor IPOs since they are appropriate for firms of any size, regardless of their growth prospects or lack of operating history.

Athos adds the following comments on terminal value projections:

Statement 3:	For venture capital projects, estimating terminal value with certainty is difficult given the relatively young age of these firms. To calculate the investor’s future wealth, however, one valuation technique is the IRR method.
Statement 4:	To project the terminal value for leveraged buyout (LBO) investments, we often use the free cash flow method or sales or earnings multiples approach.

Following their meeting with the investors, Athos and Brie meet privately to assess the fund’s recent performance. Athos and Brie charge 1.5% to manage the fund, and carried interest of 25% is paid based on the total return method using committed capital. The fund’s investors committed to a total of $500 million in capital over ten years. A scaled-down version of the firm’s statistics for the last five years is given in the following table (in $ millions):

Fund Cash Flows
	Capital Called Down	Operating Results	Mgmt Fees	NAV before Distributions	Distributions	NAV after Distributions
2004	200	-40	3.0	157.0		157.0
2005	100	-70	4.5	182.5		182.5
2006	100	100	6.0	376.5	70	306.5
2007	50	180			100
2008	50	250			150

Finally Athos and Brie discuss two potential acquisition targets. The first is a venture capital firm with a projected discount rate of 20%. Athos and Brie, however, believe that this projection is highly optimistic given current market conditions, and speculate that in any given year there is a 30% chance of company failure. The second acquisition would be an investment in a leveraged buyout company. The company’s asset beta is estimated at 0.90 and the company uses 1/3 debt and 2/3 equity financing.

With regard to Statement 1 and 2, respectively, on an exit strategy through an IPO, Brie is:

Statement 1 Statement 2

A) Incorrect Correct

B) Correct Incorrect

C) Incorrect Incorrect

[此贴子已经被作者于2009-3-10 11:31:57编辑过]