Exam

PE101 final exam

20 questions · pass mark 70%

Answer every question, then check your answers. The pass mark is 70%.

Question 1 of 20

A portfolio manager owns 0.1% of a listed industrial company. Ashcombe Capital Fund I owns 70% of Northfield Components. Compared with the portfolio manager, what trade-off is Ashcombe making?

A It gives up control and information in return for being able to sell at any time B It gives up liquidity in return for control, better information and time to change the business C It gives up any say in strategy in return for a guaranteed share of the company's profits D It gives up a quarterly valuation in return for a daily price set by the market

Question 2 of 20

Several heavily indebted companies bought in the late 1980s buyout boom struggled to meet their debt payments. What was the main lesson for the industry?

A Buyouts work best when they are financed entirely with the fund's own equity B Deals financed with high-yield bonds always fail once interest rates rise C Large buyouts are safer than small ones because lenders watch them more closely D Leverage magnifies losses as well as gains when a company's value falls

Question 3 of 20

A fund buys 30% of a profitable software company whose revenue is growing fast. The founders stay in charge, the fund gets a board seat and a veto over major decisions, and no debt is used. Which strategy is this?

A Growth equity B Venture capital C Leveraged buyout D Turnaround

Question 4 of 20

A secondaries fund buys a pension fund's interest in a buyout fund that is six years old and largely invested. Compared with committing to a brand-new fund, what is a typical advantage for the buyer?

A It no longer has to follow the terms of the fund's limited partnership agreement B It is guaranteed to pay less than the latest reported value of the interest C It can see what the fund already owns, and money may come back sooner D It takes control of the fund's portfolio companies and appoints their boards

Question 5 of 20

A pension fund that is an LP in Ashcombe Capital Fund I asks to join the deal team's weekly meetings and vote on which companies the fund buys. Why would the fund's lawyers usually advise against this?

A LPs are not allowed to receive any information about the fund's portfolio companies B Only the fund's largest LP is allowed to take part in investment decisions C Taking part in running the fund could put the LP's limited liability at risk D The LP would have to pay the management company's salaries and office costs

Question 6 of 20

A fund has $250m of total commitments, and an LP has committed $20m. The GP issues the fund's first capital call, for $30m across all LPs. How much does this LP pay, and what is its unfunded commitment afterwards?

A $2.4m, leaving $17.6m unfunded B $3.0m, leaving $17.0m unfunded C $2.4m, leaving $20.0m unfunded D $6.0m, leaving $14.0m unfunded

Question 7 of 20

Two years after committing to a new buyout fund, an LP's trustee notices that the fund's reported returns are negative and the LP has received no distributions. What is the most likely explanation?

A The GP has written off most of the companies it bought in the first two years B The fund has breached its LPA by not returning any capital within two years C The LP has been charged a default penalty for paying a capital call late D Fees and investments come early, while exits and distributions usually come later

Question 8 of 20

A fund uses a whole-fund waterfall with 20% carry and a full catch-up. LPs contributed $200m, the fund distributes $300m in total, and the preferred return owed is $60m (given). How much does the GP receive in total?

A $15m B $20m C $8m D $60m

Question 9 of 20

Ashcombe's management company charges Northfield Components an annual monitoring fee for advising its board. Under many LPAs, what happens to this fee?

A Some or all of it is offset against the management fee paid by the fund B It is added to the GP's carried interest when the fund is wound up C It is paid out to LPs as a distribution in the quarter it is received D It replaces the preferred return owed to LPs for that year

Question 10 of 20

A manager built a strong record buying small, family-owned industrial companies. Its new fund is three times larger and plans large take-privates of listed companies. Which concern would an LP most likely raise in due diligence?

A Team stability, because a larger fund always has to hire a new investment team B Fees, because a larger fund is not allowed to charge a management fee C Liquidity, because take-privates can be sold on a stock exchange at any time D Style drift, because the manager is moving into deals it knows less well

Question 11 of 20

In the first round of an auction run by an investment bank, Ashcombe submits a price range of $180m to $200m for a company. What is this, and what usually comes next if Ashcombe is shortlisted?

A A binding final bid; the seller must now sign a sale and purchase agreement B A letter of intent; Ashcombe gets exclusivity while it completes diligence C A non-binding indicative bid; it gets data room access and management meetings D An investment committee approval; the lender funds its loan straight away

Question 12 of 20

On the day Ashcombe's purchase of Northfield Components closes, which set of events is most typical?

A The investment committee meets for the first time and the seller launches its auction B The lender funds its loan, the fund calls capital for the equity, and money moves under a funds flow C Due diligence begins and Ashcombe commissions a quality of earnings report D The LPs vote to approve the deal and the GP signs a letter of intent

Question 13 of 20

A fund buys a company with EBITDA of $15m at 8.0x, using debt of 4.0x EBITDA and equity for the rest. Five years later EBITDA is $18m, the company sells at 8.0x and debt has been paid down to $36m. Ignoring fees, interest and taxes, what are the fund's equity value at exit and its MOIC?

A $144m and 2.4x B $84m and 1.4x C $144m and 1.2x D $108m and 1.8x

Question 14 of 20

The unitranche loan used to buy Northfield Components is made to Northfield, or to a holding company set up to buy it. If Northfield later failed, what would Ashcombe Capital Fund I typically lose?

A Its equity in Northfield, but it would not normally have to repay the loan B Its equity and the full loan, because the fund guarantees buyout debt C Nothing, because lenders absorb losses before equity holders do D Only the fees its manager charged Northfield while it owned the company

Question 15 of 20

Ashcombe owns a platform company valued at about 10.0x EBITDA. It buys a much smaller competitor for 6.0x EBITDA and combines the two. If the combined business is later valued at the platform's multiple, what is this source of value often called?

A Multiple contraction B Multiple arbitrage C Debt paydown D A dividend recapitalization

Question 16 of 20

Ashcombe Capital Fund I sells its whole stake in Northfield Components, for cash, to a buyout fund managed by a different private equity firm. What is this exit route called?

A An LP-led secondary B A continuation fund C A secondary buyout D A dividend recapitalization

Question 17 of 20

Ashcombe Capital Fund I has sold its last company. Which set of steps is typical before the fund is dissolved?

A Settle liabilities, keep any reserve needed, pay final distributions and carry, and audit final accounts B Call the LPs' remaining unfunded commitments, then return that money as a final distribution C Transfer the remaining cash to the management company to pay fees on the firm's next fund D Ask the LP advisory committee to approve a new ten-year term so the fund can invest again

Question 18 of 20

At the end of year 7, a fund has paid-in capital of $200m, has distributed $150m to date and reports NAV of $130m. What are its DPI and TVPI?

A DPI 0.65x and TVPI 1.40x B DPI 0.75x and TVPI 0.65x C DPI 1.40x and TVPI 0.75x D DPI 0.75x and TVPI 1.40x

Question 19 of 20

Manager X reports a gross MOIC of 2.2x on its last fund's deals. Manager Y reports a net TVPI of 1.8x for its last fund. Why can't an LP conclude from these figures alone that X did better?

A Because MOIC can be calculated only once every company in a fund has been sold B Because gross figures are before fees, expenses and carry, so X's net figure will be lower C Because TVPI measures how fast money grew, while MOIC ignores the size of the gain D Because net figures are always higher than gross figures when a fund does well

Question 20 of 20

Ashcombe Capital Fund I's annual financial statements are audited. What does that usually mean for the valuations in its third-quarter report?

A They are audited too, because every quarterly report carries an audit opinion B They are set by the auditor rather than the GP, so no judgment is involved C They are the GP's fair value estimates, and quarterly figures are usually not audited D They are held at cost until the auditor approves a new value at year-end