Venture Capital and Investment Fundamentals Quiz

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Questions and Answers

What is the market to book ratio used to measure?

Equity value

Why is it more difficult to valuate start-up companies compared to big companies using comparables?

Start-up companies often have unique characteristics that are hard to find in comparables

What makes it difficult to obtain share price for private companies?

Lack of public information

What is the typical percentage of debt and equity used to highly leverage a holding in an LBO?

70% of debt and 30% of equity Signup and view all the answers

How long does the holding company usually have to pay back the debt it issued to acquire the target in an LBO?

5 to 7 years Signup and view all the answers

After the holding company has paid back the debt, what percentage of the target do the shareholders typically own?

100% Signup and view all the answers

How can an LBO fund exit an investment?

IPO Signup and view all the answers

What is the measure of success in an LBO investment that calculates the value at which shares are sold divided by the value at which they were bought?

MoM (Multiple of Money) Signup and view all the answers

What is the formula for calculating the Internal Rate of Return (IRR) in an LBO investment?

$IRR = (equity proceeds at exit / initial equity invested) ^ (1/years) - 1$ Signup and view all the answers

What is the typical percentage range for management fees charged by GP's in LBO?

1.5% - 2% Signup and view all the answers

What is the typical percentage of carried interest charged by GP's in LBO?

20% Signup and view all the answers

What is the hurdle return typically set at for LP's in an LBO investment?

8% per annum Signup and view all the answers

What is the primary method used to ensure the success of an LBO investment?

Due diligence process Signup and view all the answers

What is the typical duration of the initial due diligence process in an LBO investment?

Between 3 and 4 weeks Signup and view all the answers

What happens when more debt is used in an LBO?

It increases the ROE but is more risky for shareholders Signup and view all the answers

What are General Partners (GPs) responsible for in Private Equity (PE) funds?

Day-to-day management and can lose more money than invested Signup and view all the answers

Why are start-ups usually financed with equity?

Due to lack of trust from banks to reimburse debt Signup and view all the answers

What is the primary purpose of the comparable method in company valuation?

To determine the value of the company being evaluated Signup and view all the answers

What does the discounted cash flows method involve?

Computing cash flows, terminal value, discount rate, and DCF calculation Signup and view all the answers

Why is sensitivity analysis required for terminal value computation?

Terminal value computation can have multiple hypotheses Signup and view all the answers

What is the primary purpose of Private Equity (PE)?

To make investments in various forms such as Venture Capital, LBO, and distressed debt Signup and view all the answers

What is the role of Limited Partners (LPs) in Private Equity (PE) funds?

Providing funds and having limited liabilities Signup and view all the answers

What is the purpose of General Partners (GPs) taking management fees and carried interest?

To incentivize hard work and risk-taking Signup and view all the answers

Why do General Partners (GPs) invest only a small percentage but receive a significant portion of the profits?

To align their interests with the success of the investments Signup and view all the answers

Which company is cited as the largest IPO VC-backed company?

Airbnb Signup and view all the answers

When was the first VC fund founded?

1946 Signup and view all the answers

What was the significant return from an investment in the Digital Equipment Company?

Significant return Signup and view all the answers

What are the direct costs of legal fees associated with debt restructuring for large companies?

2-3% of assets Signup and view all the answers

What are the advantages of private workouts in debt restructuring?

Lower direct costs, shorter duration, secrecy, and no judicial intervention Signup and view all the answers

What are the bankruptcy filing options under the US Bankruptcy code?

Chapter 7 for liquidation and Chapter 11 for reorganization Signup and view all the answers

What do public workouts involve in debt restructuring?

Third-party intervention, not requiring unanimous stakeholder agreement, and less information asymmetry Signup and view all the answers

What does asset value depend on in debt restructuring?

Economic conditions and legal orientation towards creditors or debtors in the country of operation Signup and view all the answers

What are the challenges of implementing private restructuring with multiple lenders?

Behavior can be soft (reducing payments, extending loans) or tough (increasing payments, accelerating liquidation) Signup and view all the answers

What is the outcome of debt for equity swaps?

Old debt converting to new equity, leading to significant dilution for original shareholders Signup and view all the answers

What does time inconsistency lead to in debt restructuring?

Moral hazard and potential preference for saving the company upon default Signup and view all the answers

What do leveraged buyouts (LBO) involve?

Acquisition of listed companies using a mix of private equity funds and debt Signup and view all the answers

What percentage of all transactions do LBO transactions represent?

5% Signup and view all the answers

Who conducted the largest LBO ever?

KKR, acquiring RJR Nabisco for $55.38 billion Signup and view all the answers

What is the largest source of venture capital investment in the US?

Pension funds Signup and view all the answers

What is the maximum investment of Business Angels?

$1,000,000 Signup and view all the answers

Who typically invests in early-stage ventures due to the higher risk involved?

Government agencies Signup and view all the answers

What are the different types of venture capitalists mentioned in the text?

Independent VCs, corporate VCs, and banks VCs Signup and view all the answers

What do gatekeepers, such as investment advisors, do in facilitating venture investments?

They play a key role in facilitating venture investments Signup and view all the answers

What is the role of venture capital in high-growth companies?

Providing guidance for company growth Signup and view all the answers

What is the percentage of corporate investors in venture capital in Europe?

14% Signup and view all the answers

What is the significance of the close date in venture capital?

It refers to the date of creation of the fund Signup and view all the answers

What is the primary reason for governments to invest in early-stage ventures?

To support innovation and economic growth Signup and view all the answers

What exists between VCs and entrepreneurs, with VCs having more market information and entrepreneurs having better product knowledge?

Asymmetric information Signup and view all the answers

What are the limitations of valuation methods like DCF and comparables, as mentioned in the text?

They do not consider flexibility and follow-on investments Signup and view all the answers

What does debt restructuring involve?

Changes in the characteristics of the debt contract Signup and view all the answers

What is the primary role of gatekeepers in facilitating venture investments?

Screening potential investments and providing due diligence Signup and view all the answers

What is the maximum investment amount of Business Angels?

$1,000,000 Signup and view all the answers

What is the main reason governments usually invest in early-stage ventures?

To support innovation and economic development Signup and view all the answers

What is the primary reason for the existence of asymmetric information between VCs and entrepreneurs?

VCs having more market information and entrepreneurs having better product knowledge Signup and view all the answers

What are the limitations of valuation methods like DCF and comparables?

They have limitations in considering flexibility and follow-on investments Signup and view all the answers

What does debt restructuring involve?

Changes in the characteristics of the debt contract, such as interest rate, maturity, covenant waiver, increase in collateral, etc. Signup and view all the answers

What is the typical investment focus of independent VCs?

Investing in a wide range of high-growth companies Signup and view all the answers

What is the significance of the close date of a venture capital fund?

It refers to the date of creation of the fund Signup and view all the answers

What is the largest source of venture capital investment in Europe?

Government agencies Signup and view all the answers

Who are the largest investors in the US venture capital industry?

Pension funds Signup and view all the answers

What was the initial prohibition on pension funds regarding high-risk asset classes?

Investing substantial amounts in high-risk asset classes like private equity Signup and view all the answers

What are the different types of venture capitalists mentioned in the text?

Independent VCs, corporate VCs, and banks VCs Signup and view all the answers

What is the typical percentage range for management fees charged by General Partners (GPs) in Private Equity (PE) funds?

1-2% Signup and view all the answers

What is the primary purpose of sensitivity analysis in terminal value computation?

To assess the impact of changes in key assumptions on the terminal value Signup and view all the answers

What is the measure of success in an LBO investment that calculates the value at which shares are sold divided by the value at which they were bought?

Multiple of invested capital (MOIC) Signup and view all the answers

What is the significance of the close date in venture capital?

Refers to the date of creation of the fund Signup and view all the answers

What is the typical percentage of carried interest charged by General Partners (GPs) in LBO?

25% Signup and view all the answers

What is the primary reason for governments to invest in early-stage ventures?

To support innovation and economic growth Signup and view all the answers

What do valuation methods like DCF and comparables have limitations in considering?

Flexibility and follow-on investments Signup and view all the answers

What is the maximum investment of Business Angels?

$1,000,000 Signup and view all the answers

What exists between Venture Capitalists (VCs) and entrepreneurs?

Asymmetric information Signup and view all the answers

What is the typical percentage of corporate investors in venture capital in Europe?

20% Signup and view all the answers

What do gatekeepers, such as investment advisors, do in facilitating venture investments?

Play a key role in facilitating venture investments Signup and view all the answers

What is the biggest source of venture capital investment in the US?

Pension funds Signup and view all the answers

Study Notes

Venture Capital and Investment Fundamentals

In 2017, pension funds in the US invested about $33 billion in venture capital, significantly aiding its development.
The biggest investors of venture capital in Europe are government agencies (20%), corporate investors (14%), pensions funds (12%), insurance companies (11%), and private individuals (12%).
In the US, pension funds are the largest investors in the venture capital industry.
A rule in 1979 prohibited pension funds from investing substantial amounts in high-risk asset classes like private equity, but this was later relaxed.
Gatekeepers, such as investment advisors, played a key role in facilitating venture investments.
Venture capital involves fundraising from limited partners (LPs), investing in high-growth companies, providing guidance for company growth, and eventually exiting via acquisition or IPO.
Different types of venture capitalists include independent VCs, corporate VCs, and banks VCs.
The close date refers to the date of creation of the fund, while the maximum investment of Business Angels is $1,000,000.
Governments usually invest in early-stage ventures due to the higher risk involved.
Asymmetric information exists between VCs and entrepreneurs, with VCs having more market information and entrepreneurs having better product knowledge.
Valuation methods like DCF and comparables have limitations in considering flexibility and follow-on investments.
Debt restructuring involves changes in the characteristics of the debt contract, such as interest rate, maturity, covenant waiver, increase in collateral, etc.

Venture Capital and Investment Fundamentals

In 2017, pension funds in the US invested about $33 billion in venture capital, significantly aiding its development.
The biggest investors of venture capital in Europe are government agencies (20%), corporate investors (14%), pensions funds (12%), insurance companies (11%), and private individuals (12%).
In the US, pension funds are the largest investors in the venture capital industry.
A rule in 1979 prohibited pension funds from investing substantial amounts in high-risk asset classes like private equity, but this was later relaxed.
Gatekeepers, such as investment advisors, played a key role in facilitating venture investments.
Venture capital involves fundraising from limited partners (LPs), investing in high-growth companies, providing guidance for company growth, and eventually exiting via acquisition or IPO.
Different types of venture capitalists include independent VCs, corporate VCs, and banks VCs.
The close date refers to the date of creation of the fund, while the maximum investment of Business Angels is $1,000,000.
Governments usually invest in early-stage ventures due to the higher risk involved.
Asymmetric information exists between VCs and entrepreneurs, with VCs having more market information and entrepreneurs having better product knowledge.
Valuation methods like DCF and comparables have limitations in considering flexibility and follow-on investments.
Debt restructuring involves changes in the characteristics of the debt contract, such as interest rate, maturity, covenant waiver, increase in collateral, etc.

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Venture Capital and Investment Fundamentals Quiz

Questions and Answers

What is the market to book ratio used to measure?

Why is it more difficult to valuate start-up companies compared to big companies using comparables?

What makes it difficult to obtain share price for private companies?

What is the typical percentage of debt and equity used to highly leverage a holding in an LBO?

How long does the holding company usually have to pay back the debt it issued to acquire the target in an LBO?

After the holding company has paid back the debt, what percentage of the target do the shareholders typically own?

How can an LBO fund exit an investment?

What is the measure of success in an LBO investment that calculates the value at which shares are sold divided by the value at which they were bought?

What is the formula for calculating the Internal Rate of Return (IRR) in an LBO investment?

What is the typical percentage range for management fees charged by GP's in LBO?

What is the typical percentage of carried interest charged by GP's in LBO?

What is the hurdle return typically set at for LP's in an LBO investment?

What is the primary method used to ensure the success of an LBO investment?

What is the typical duration of the initial due diligence process in an LBO investment?

What happens when more debt is used in an LBO?

What are General Partners (GPs) responsible for in Private Equity (PE) funds?

Why are start-ups usually financed with equity?

What is the primary purpose of the comparable method in company valuation?

What does the discounted cash flows method involve?

Why is sensitivity analysis required for terminal value computation?

What is the primary purpose of Private Equity (PE)?

What is the role of Limited Partners (LPs) in Private Equity (PE) funds?

What is the purpose of General Partners (GPs) taking management fees and carried interest?

Why do General Partners (GPs) invest only a small percentage but receive a significant portion of the profits?

Which company is cited as the largest IPO VC-backed company?

When was the first VC fund founded?

What was the significant return from an investment in the Digital Equipment Company?

What are the direct costs of legal fees associated with debt restructuring for large companies?

What are the advantages of private workouts in debt restructuring?

What are the bankruptcy filing options under the US Bankruptcy code?

What do public workouts involve in debt restructuring?

What does asset value depend on in debt restructuring?

What are the challenges of implementing private restructuring with multiple lenders?

What is the outcome of debt for equity swaps?

What does time inconsistency lead to in debt restructuring?

What do leveraged buyouts (LBO) involve?

What percentage of all transactions do LBO transactions represent?

Who conducted the largest LBO ever?

What is the largest source of venture capital investment in the US?

What is the maximum investment of Business Angels?

Who typically invests in early-stage ventures due to the higher risk involved?

What are the different types of venture capitalists mentioned in the text?

What do gatekeepers, such as investment advisors, do in facilitating venture investments?

What is the role of venture capital in high-growth companies?

What is the percentage of corporate investors in venture capital in Europe?

What is the significance of the close date in venture capital?

What is the primary reason for governments to invest in early-stage ventures?

What exists between VCs and entrepreneurs, with VCs having more market information and entrepreneurs having better product knowledge?

What are the limitations of valuation methods like DCF and comparables, as mentioned in the text?

What does debt restructuring involve?

What is the primary role of gatekeepers in facilitating venture investments?

What is the maximum investment amount of Business Angels?

What is the main reason governments usually invest in early-stage ventures?

What is the primary reason for the existence of asymmetric information between VCs and entrepreneurs?

What are the limitations of valuation methods like DCF and comparables?

What does debt restructuring involve?

What is the typical investment focus of independent VCs?

What is the significance of the close date of a venture capital fund?

What is the largest source of venture capital investment in Europe?

Who are the largest investors in the US venture capital industry?

What was the initial prohibition on pension funds regarding high-risk asset classes?

What are the different types of venture capitalists mentioned in the text?

What is the typical percentage range for management fees charged by General Partners (GPs) in Private Equity (PE) funds?

What is the primary purpose of sensitivity analysis in terminal value computation?

What is the measure of success in an LBO investment that calculates the value at which shares are sold divided by the value at which they were bought?

What is the significance of the close date in venture capital?

What is the typical percentage of carried interest charged by General Partners (GPs) in LBO?

What is the primary reason for governments to invest in early-stage ventures?

What do valuation methods like DCF and comparables have limitations in considering?

What is the maximum investment of Business Angels?

What exists between Venture Capitalists (VCs) and entrepreneurs?

What is the typical percentage of corporate investors in venture capital in Europe?

What do gatekeepers, such as investment advisors, do in facilitating venture investments?

What is the biggest source of venture capital investment in the US?

Study Notes

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