Private Equity and Segregated Funds Quiz

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Questions and Answers

What is the primary difference between traditional private equity firms and listed private equity companies?

Traditional private equity firms have a large number of partners.

Traditional private equity firms focus solely on publicly traded companies.

Listed private equity companies can only invest in real estate.

Listed private equity companies trade publicly on exchanges. (correct)

Which of the following is a reason for the recent trend of private equity firms becoming publicly listed?

Improved auditor requirements and stricter guidelines.

A decline in investment opportunities in private companies.

Increased competition from foreign investment firms.

Better access to capital and improved liquidity. (correct)

How do investors typically access shares of listed private equity companies?

Via mutual funds specializing in private equity.

Through venture capital partnerships.

By trading them on a stock exchange like other public shares. (correct)

Through private placements only.

In what sectors does ABC Corp., as an example of a listed private equity firm, primarily invest?

Real estate, financial, and health care. Signup and view all the answers

What regulatory requirement do listed private equity firms have that traditional private equity firms do not?

Mandatory quarterly reporting. Signup and view all the answers

Which statement about the contract holder in a segregated fund is correct?

The contract holder can either be the same as or different from the annuitant depending on the plan type. Signup and view all the answers

What is a key characteristic of segregated funds compared to mutual funds?

Segregated funds assign notional units to investors rather than actual units. Signup and view all the answers

Which of the following options is NOT a type of registered plan discussed?

Health Savings Account (HSA) Signup and view all the answers

What educational requirement is outlined for selling segregated funds in Canada?

Completion of a licensing course prescribed by the Canadian Council of Insurance Regulators. Signup and view all the answers

In the context of segregated funds, how is the annuitant defined?

The individual whose life is insured by the contract and on whom insurance benefits depend. Signup and view all the answers

What happens to the death benefit if the market value of the segregated fund at death is below the guaranteed amount?

The beneficiary receives the guaranteed amount. Signup and view all the answers

In a scenario where a segregated fund has a guaranteed amount of $75,000 and a market value of $65,000 at the time of death, what does the beneficiary actually receive?

The beneficiary receives $75,000. Signup and view all the answers

Which of the following statements about creditor protection for segregated funds is true?

Segregated funds provide creditor protection due to ownership by the insurance company. Signup and view all the answers

When a contract provides a guaranteed death benefit, what condition affects whether the beneficiary receives the market value instead?

The comparison between the market value and the guaranteed amount. Signup and view all the answers

If Keith's segregated fund had a market value of $11,000 at his death with a guaranteed amount of $10,000, how much would Patricia receive?

$11,000 Signup and view all the answers

What is the primary tax treatment of income earned by a segregated fund?

The income is taxed at the contract holder's income tax rate in the current year. Signup and view all the answers

What is the impact of allocations on the net asset value per share of a segregated fund compared to a mutual fund?

Segregated funds do not decline in NAVPS after allocations, while mutual funds do. Signup and view all the answers

How is the tax treatment of capital losses different between segregated funds and mutual funds?

Capital losses in mutual funds can only be used to offset future gains within the fund. Signup and view all the answers

What key factor influences how income from a segregated fund is allocated to its contract holders?

The total number of units held and the duration those units are held. Signup and view all the answers

What happens to the maturity guarantee payments of a segregated fund contract when received?

Income tax is applied only if the proceeds exceed the adjusted cost base. Signup and view all the answers

Study Notes

Other Managed Products

Additional types of managed products include their structure, characteristics, regulatory issues, and tax considerations
Learning objectives cover describing the features and structure of segregated funds
Discussing the advantages and disadvantages of Labour-Sponsored Venture Capital Corporations
Describing the features and structure of closed-end funds
Differentiating among the types of income trusts
Describing the advantages, disadvantages, and process for investing in private equity
Segregated funds are like mutual funds, but considered an insurance product
Proceeds go to purchase assets and funds are sold to investors.
They offer professional investment management, advice, small investment amounts, and regular statements
Segregated funds offer unique features such as maturity protection, death benefits, and creditor protection.
They are insurance contracts (individual variable insurance contracts) between a contract holder and an insurance company.
Regulated by provincial insurance regulators
Canadian Life and Health Insurance Association Inc. and the Office of the Superintendent of Financial Institutions oversee segregated funds in each province and territory.
Federal insurance regulators do not regulate the sale of segregated funds.
Assuris is the self-financing protection provider against the loss of policy benefits in the event of member company insolvency.
Assuris guarantee only covers death benefits and maturity guarantees in a segregated fund contract.
Assets of the fund are not covered.
Assuris supplements any payments of a liquidator to fulfill the insurance obligations.
Maximum compensation for individual segregated fund policies is $60,000 or 85% of promised amounts.
Segregated funds do not issue shares or units, investors are assigned notional units instead.
This approach enables comparison with mutual funds.
The contract holder is the buyer.
The annuitant is the insured person.
A revocable beneficiary allows the contract holder to alter or revoke the beneficiary's status.
An irrevocable beneficiary designation cannot be altered.
A person is considered to have an insurable interest if they benefit financially or otherwise from another person.
Segregated Funds offer maturity guarantees
At least 75% of the amount invested over a 10-year period (or upon death)
Some companies provide 100% guaranteed funds over a longer term (e.g., 15 years).
The amount of the death benefit is equal to the guaranteed amount minus the net asset value at death.
Segregated funds offer creditor protection in case of bankruptcy.
Assets are owned by the insurance company
Segregated funds also allow investors to avoid probate
Proceeds pass directly to beneficiaries, without delays due to estate disputes, and are not part of the deceased's estate.
The cost to beneficiaries is lower as there are no fees paid to executors.

Labour-Sponsored Venture Capital Corporations (LSVCCs)

LSVCCs are managed investment funds sponsored by labour organizations.
They provide capital for small to medium-sized and emerging companies
Key advantages lie in federal and provincial tax incentives (e.g., 15% federal credit)
Tax credits vary based on type of fund and province of residence
Federal and provincial tax credits for provincially registered funds are available.
LSVCCs are considered a high-risk, speculative investment, with lower returns being associated with high risk

Closed-End Funds

Closed-end funds are pooled investment funds with a limited number of shares issued.
Shares are traded on stock exchanges.
Closed-end funds can trade at a premium, par, or discount to their net asset value.
The funds' value is based on market supply and demand, in addition to the underlying assets.
Discounts can indicate potential investment problems.
The managers of these funds are paid a management fee.

Income Trusts

Income trusts are similar to closed-end funds
Investors own ownership interests.
Interests in operating assets of a company.
Exchange-traded
Traded on the Toronto Stock Exchange
Two main categories: REITs and business trusts.
REITs: purchase real estate (e.g., shopping centers, senior housings) and pass on rental income
Business trusts: purchase underlying business assets (manufacturing, retail, or service)
Both types are subject to the same risks as common equities (market conditions, economic cycles, management performance)

Listed Private Equity

Private equity is financing for companies that cannot access public markets (e.g., stock or bond).
This financing may involve private debt or equity.
It offers long-term returns with higher risk.
Different types exist, like leveraged buyouts (acquisitions using debt).
Growth capital is used with expanding firms.
Turnaround situations help underperforming companies
Early/late stage venture capital is used with emerging businesses, usually in tech or other high growth industries.
Distressed debt involves purchasing debt securities from struggling companies.
Mezzanine financing uses preferred equity or subordinated loans.
Listed private equity companies trade on public exchanges (e.g., TSX), providing liquidity.

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Description

Test your knowledge on the differences between traditional private equity firms and listed private equity companies. This quiz also explores segregated funds, their characteristics, and regulatory requirements in Canada. Answer questions related to investment sectors, contract holders, and educational requirements.