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equity asset valuation
Venture Capital And Private Equity 2nd Edition Josh Lerner, Felda Hardymon, Ann Leamon - Solutions
What are the three main traits required of an analyst? What are the keys to promotion for an analyst?
Describe the typical organization of a private equity firm. What are the main motivating factors that result in this type of organization?
What are the key characteristics a private equity firm seeks when evaluating an entry-level hire?
Is there an ideal background for a private equity professional? A venture capitalist? Buyout investor?
The ruler of the country of Utopia has approached you to recommend three principles to follow in creating a government program to jumpstart its currently miniscule private equity industry. The country has a robust financial system, a strong entrepreneurial tradition, and a healthy tech sector,
How does the SBIR employment data (Exhibit 10.5) influence your answer?
What specific challenges might subnational governments (states, provinces, etc.) encounter than make it more difficult to create successful private equity industry?
What are three major ways in which government funding can go awry?
How can government funding help create a private equity industry?
What do you think explains the pattern of employment change in buyout targets relative to their peers?Why might they vary according to the different type of buyout?
What might explain the finding observed in the paper by Lerner et al., where companies that have been bought out appear to pursue more economically important innovations?
What do you think accounts for the fact that the failure rate for buyouts is lower than the default rate on corporate bonds?
Why would companies backed by more-established venture firms have higher improvement in TFP?
Why do you think venture-backed companies would produce more and higher-quality patents than non-venture-backed companies?
Why is it so difficult to determine conclusively the impact of VC on innovation?
What would make the better governance of private-equity-owned firms persist?
Why do you think private equity firms would create good governance in their portfolio companies?
In what ways do Hochberg’s findings support or contest those of Davis et al.?
What in the structure of VC firms might explain the patterns that Puri and Zarutskie observed?
Why do you think there has been such emphasis on taking successful venture-backed companies public?
What are some of the ways investors diversify their private equity holdings?
In 2021, private equity holdings delivered blockbuster returns to university endowments. If you managed an endowment, would you plan to increase, decrease, or keep constant your allocation to the asset class in 2022? How would you execute your strategy? What risks might you encounter?
FAS 157/OAS 820 requires that private equity firms mark their holdings to market on a quarterly basis.What are the benefits and drawbacks of such frequent revaluations?
Why might private equity firms be generally conservative in valuing their investments? What could be the drawbacks of this approach?
What is the stale price problem and what are the resulting issues?
If a buyout fund invested $300 million on March 31, 2015 and returned $800 million on June 30, 2018, calculate the PME during the same period. (Use S&P 500 as a benchmark.)
What does the PME seek to accomplish?
What is a pooled IRR? When would you want to use one?
How is it possible to derive two IRRs for the same investment using the same methodology?
Explain the difference between the “calendar-time” and the “time-zero” methods of calculating IRRs.Which method is more likely to improve returns?
Over the long haul, the worst-performing buyout funds have been the largest. Why has this been the case?
When evaluating a fund based on its cash-on-cash returns, what other considerations should you keep in mind?
What are the advantages of evaluating fund performance based on IRR? Why would an investor prefer to evaluate a fund based on a cash-on-cash return?
Explain the occasional correlation between a private equity fundraising and valuation levels for their private equity investments.
What are the dangers of taking private equity returns information at face value?
How has the issue of exiting from deals in emerging markets been addressed? What else do you think should be done?
What are the challenges of pricing deals in developing nations?
What are some of the risks associated with private equity investment in developing nations not often seen in developed nations?
Why have investors been reluctant to make venture capital investments in developing nations?
Compare and contrast government policies for private equity in Argentina and Brazil.
What are the advantages of local currency denominated funds?
Despite the numerous difficulties and challenges of investing in emerging markets, why have private equity firms continued to focus on these opportunities?
What impact does a country’s level of IPO activity have on its venture capital funding? How does this compare to the impact of labor market rigidities?
Why are developing nations seeking to attract private equity investment?
Despite the fact that Germany is Europe’s largest economy, why has the private equity market in Germany been challenging?
What are some of the difficulties European buyout firms face when investing across European nations?
What are the characteristics of the European business landscape that have made Europe an attractive market for buyouts?
What are some of the key issues with distributing stock directly to LPs in conjunction with an IPO?What would LPs prefer?
Under which circumstances might it make the most sense to shut down a distressed business rather than inject additional capital or engage in a sale process?
What are some of the potential issues associated with a sponsor-to-sponsor (secondary buyout)transaction?
What are some of the reasons for avoiding an auction process?
What purpose does a corporate VC serve? What are the potential advantages?
What is a possible explanation for why a VC-backed IPO outperformed the market after its IPO for several years?
What is a “Greenshoe” and why does it exist?
Explain the phenomenon of underpricing as it relates to IPOs.
Why would a public company prefer institutional holders to comprise a large portion of their investor base? Who is responsible for attracting these investors?
What are some of the key advantages of being a public company? What are the disadvantages?
Why might the pursuit of an IPO elicit higher interest and/or offers from strategic acquirers?
What are some of the characteristics of a private company that may prevent it from going public?
What are some of the characteristics of a private company that may increase the likelihood of a public market exit?
What are some of the possible explanations for why acquisitions account for a greater percent of exits than IPOs?
What are some of the key considerations in determining whether to take a company public (IPO)?
Exits are ultimately how private equity firms realize returns on their investments. Describe the various ways for a private equity firm to exit an investment.
If you were one of Travelport’s junior noteholders, what would make you take the offered deal? As one of Travelport’s senior noteholders, how could you be convinced to agree to the new deal?
Why would LPs agree to have their GPs put more money into a struggling company? How does that differ from a bank’s response to a company’s difficulties? How does that help to explain the differences between the sorts of companies that take VC investment as opposed to those that take bank debt?
How does staged financing complicate the management of a venture deal? How could a board member from an early round resolve some of these issues?
Why is consensus building such an important part of a board member’s work?
Why would the board of Endeca Technologies have thought a professional manager was a good replacement for the founder? Why might that manager have then succeeded with another company? What sort of company would have matched his skills?
As best you can from the material in the text, how did different deal management styles or economic contexts contribute to the success of Hilton Hotels and the failure of J. Crew? As an LP, which approach would inspire more confidence? Why?
How can a situation like KKR’s break-up of Beatrice be said to create value?
How does value creation differ between VC and buyout investments? Why?
Consider the Value Creation Framework. Why doesn’t it include changes in the external market?
From the venture capitalist’s point of view, what are three reasons for staged financing?
Calculate the final ownership for Walt if he raises $12 million at $8 million pre-money, as opposed to the following at two-year increments: (1) $3 million at $3 million pre-money; (2) $3 million at $9 million pre-money; and (3) $6 million at $24 million pre-money.
Why would a board have special voting rights? How do these address some of the basic tenets of private equity?
Hardy Smith, a noted venture capitalist, sits on the board of Walt’s Widgets. When widget sales fall consistently short of expectations, which of the following (there may be several) would Hardy be mostly likely to do and why?a. get on the road himself to sell the widgetsb. suggest different
How do VC boards differ in composition compared to the boards of companies that have been bought out?
Assume Max and Sam are negotiating their first round in SpecialStuff. Sam is sure that $3 mm is all that will be needed, but Max believes it will take at least twice that. The round is for $3 mm and the parties have narrowed the range to the 30 percent ownership buying 25 to 40 percent.a. What
If a mezzanine investor has received warrant coverage for 5 percent of a $3 million loan where the equity investors are paying $2.50 per share, how many shares will she be able to buy and at what price?
Calculate the difference in Max’s ownership in the following scenarios: SpecialStuff raised its A round at $1.50 per share. Max invested $1.5 million for 1 million shares and 30% ownership. Now SpecialStuff is raising a B round, but the market has turned against it and Acme will only pay $1.00
How does anti-dilution make sense?
SpecialStuff needs another $3 million. Acme, happy with its returns on Sam’s first company, eagerly agrees to participate, investing $4 million for 20 percent of the company. Assume the first round was as in question 6 and each owns convertible preferred stock.a. How much do Max and Sam now
Consider that you hold securities in a company that has just accepted an investment of $10 million with 6× liquidation at $3 million pre-money. How would you value this company if you were the “new money”? The previous investors?
Why would an investor even fund a company that would accept a 5× liquidation preference?
Ever the risk-taker, Maxine has invested in another of Sam’s companies. This time, she pays $3 million for 30 percent of Special Stuff (SS). Calculate the payout table and draw the graphs for Max and Sam in the following situations:a. The deal is structured as all-common, and PredatoryPurchaser
Why would Mark Rockefeller and Mickey Konson of StreetShares agree to a transaction that included a 3× liquidation preference, an ongoing quarterly management fee, a put in six years priced at the greater of fair market value or the accrued return, and a $5 million pre-money valuation clawback
Why is the concept of vesting used in venture capital deals? Why do managements agree to it?
How does the concept of fiduciary duty play into the use of preferred stock?
If you were an entrepreneur, how would you think of the difference between a preferred-plus-cheapcommon structure and a convertible preferred structure?
Why do venture capitalists use preferred stock?
What are some of the difficulties regulators face regarding portfolio company valuations?Compare and contrast how FASB and PEIGG define fair value. Which do you agree with? Why?
Under what circumstances is using the option pricing model more useful than the discounted cashflow method?
What are the criticisms of using high discount rates for the VC method? How do venture capitalists justify their use?
If a venture capitalist owns 20 percent of a firm today, and the firm intends to undertake three additional rounds of financing, selling additional shares of the firm’s equity of 20 percent, 25 percent, and 20 percent, calculate her retention ratio.
Calculate the APV for Hi-Tech using the assumptions in Exhibit 4.5, and assuming the firm takes on$100 million debt at the time of the sale. At the end of each subsequent year to the sale, $25 million of this debt is retired.
Under what circumstances is it more useful to use the APV method than the NPV method?
What are the drawbacks of the NPV method?
Recalculate the NPV of Hi-Tech using the data in Exhibit 4.5, but assume that the company is currently not at its target capital structure, which in actuality is 30 percent debt and 70 percent equity. Also assume the firm’s cost of debt is 8 percent.
Calculate the WACC using the following assumptions:$200 million 4%3%$400 million 30%1.9( ) 7.5%d fm f Dr rE r r
What are appropriate multiples to use when comparing two companies with different capital structures and varying levels of capital expenditures? Which are not?
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