LOS l: State and discuss the issues that must be addressed in formulating a private equity investment strategy.

Q1. An investor in private equity needs to prepare for capital calls, which:

A)   equal the funds promised at the initiation of the fund and usually occur during the first five years of the fund.

B)   is additional money requested by the sponsor as mezzanine financing after the commitment period.

C)   occurs at the beginning of the life of the fund before the commitment period.

Q2. In making investments in private equity, diversification is:

A)   possible by holding a number of positions, and the size of the portfolio is not an issue.

B)   not possible to any investor.

C)   possible by holding a number of positions, but usually only for investors with portfolios over $100 million.

Q3. Jill Tillman, CFA, has a client who wishes to invest in private equity. The client’s total portfolio is $80 million. The client wants to invest $10 million in private equity, wants to keep the money invested for 7-10 years, and does not need liquidity. Tillman should:

A)   invest the client’s money because private equity has the desired properties.

B)   not invest the money because private equity requires a longer holding period than specified by the client.

C)   not invest the money because it represents too much of the client’s portfolio.

LOS l: State and discuss the issues that must be addressed in formulating a private equity investment strategy. fficeffice" />

Q1. An investor in private equity needs to prepare for capital calls, which:

A)   equal the funds promised at the initiation of the fund and usually occur during the first five years of the fund.

B)   is additional money requested by the sponsor as mezzanine financing after the commitment period.

C)   occurs at the beginning of the life of the fund before the commitment period.

Correct answer is A)

This is the definition of capital calls. The investors in private equity usually make commitments at the initiation of the fund. During the first five years, or so, the sponsor gives the capital calls to the investors to get the promised funds.

Q2. In making investments in private equity, diversification is:

A)   possible by holding a number of positions, and the size of the portfolio is not an issue.

B)   not possible to any investor.

C)   possible by holding a number of positions, but usually only for investors with portfolios over $100 million.

Correct answer is C)

Diversification through number of positions can be a problem since commitments are usually large. Usually investors with portfolios well over $100 million can invest in the necessary 5-10 investments needed for diversification.

Q3. Jill Tillman, CFA, has a client who wishes to invest in private equity. The client’s total portfolio is $80 million. The client wants to invest $10 million in private equity, wants to keep the money invested for 7-10 years, and does not need liquidity. Tillman should:

A)   invest the client’s money because private equity has the desired properties.

B)   not invest the money because private equity requires a longer holding period than specified by the client.

C)   not invest the money because it represents too much of the client’s portfolio.

Correct answer is C)

Private equity has low liquidity. The allocation to this class should be 5% or less with a plan to keep the money invested for 7-10 years. Since the client only has $80 million, the $10 million (12.5%) requested investment is too large.

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