51 Free CFA Level 1 Practice Questions and Answers on Private Equity Valuation

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IRR (recommended by GIPS) : gross IRR (relevant between fund and portfolio companies)net IRR: relevant measure for LPsmultiples:paid in capital (PIC)distributed to paid in capital (DPI), net of mgmt fees and carried interest, cash on cash returnresidual value to paid in capital (RVPI)total value to paid in capital (TVPI)

• qualitative measures of PE inv. for investor
• forms of private equity investment
• due diligence of pe fund investments
• financial performance of PE funds (investor perspective)

1. at cost, adjusting for subsequent financing & devaluation2. at min. of cost or market value3. revaluing a portfolio comp, anytime new financing4. at cost with no adj5. using discount factor for restricted sec.6. applying illiquidity discounts to values of comp. traded firms

• net asset value (NAV)
• ways to determine NAV
• exit routes in PE
• risks of investing in PE

control premium, country risk, marketability and illiquidity discounts

• issues when calculating NAV
• considerations when valuing PE
• post money value
• exit routes in PE

r* = ((1+r) / (1 - q) )- 1q = probability of failure

• ways to determine NAV
• adjusting the discount rate
• exit routes in PE
• average life of PE

NAV after distributions prior year + capital called down - mgmt fees + operating results

• NAV after distributions
• buyouts
• average life of PE
• NAV before distributions

1. NPV (use present values)f = INV / POST2. IRR (use future values)f = FV (Inv) / exit value

• sources of value creation in PE
• venture capital return drivers
• methods to calculate fraction of VC ownership
• return pattern in PE invest.

pre money valuation, investment, potential subsequent equity dilution (future financing, conversion of convertible debt or issuance of stock options)

• paid in capital
• return pattern in PE invest.
• NAV after distributions
• venture capital return drivers

exit value = investment cost + earnings growth + increase in price multiple + reduction in debt

• LBO
• post money value
• terminal value
• exit value

most common form of ownership structure

• price per share
• committed capital
• limited partnership
• exit routes in PE

exit value can be obtained through multiple or PV of future cash flowuse scenario analysis to get a more realistic valuation

• terminal value
• post money value
• exit value
• pre money value

realized inv, evaluation of successes & failuresunrealized inv, evaluation of exit horizons and potential problemscash flow projections fund valuation, NAV & FS

• qualitative measures of PE inv. for investor
• to who is PE inv. available?
• return pattern in PE invest.
• due diligence of pe fund investments

NAV before distributions - carried interest - distributions

• NAV after distributions
• average life of PE
• management fees
• NAV before distributions

buyer acquires controlling equity positiontakeoversMBOsLBOs (financing involves senior debt, junk bonds, equity and mezzanine)

• DPI
• RVPI
• LBO
• buyouts

not a form of valuationmethod of factoring firm's cap. structure and other parameters to determine the return the PE firm should expect, detemine max price should pay

• buyouts
• DPI
• RVPI
• LBO

1. IPO2. secondary market sale3. management buyout4. liquidation* exit timing important

• costs of PE inv.
• exit value
• post money value
• exit routes in PE

compensation linked to performancetag along, drag along (acquirer must also extend offer to management)board representation for PEnoncompete clausespriority in claimsrequired approvals for acquisitions, divestitures,etcearn-outs (ties the acquisition price to portfolio company's future performance)

• corporate governance terms of PE fund
• control mechanisms contained in the term sheet to align interests
• post money of first round if there is a second round inv
• new shares and price in the second round

amount of funds actually received from investors

• committed capital
• costs of PE inv.
• paid in capital
• DPI

venture capital (less mature, usually with specific focus, e.g. biotech, & emphasize revenue growth)buyout firms (emphasize EBIT or EBITDA, stable earnings growth)

• parties in a private equity investment transaction
• terms of PE fund
• forms of private equity investment
• sources of value creation in PE

syndicated loan market (often repackaged as collaterized loan obligations)CDOs

• ways to determine NAV
• risks of investing in PE
• where does the debt financing come from?
• how is debt quoted in PE?

percentage fee * paid in capital

• management fees
• pre money value
• average life of PE
• exit value

1. target firm's forecasted cash flows2. expected returns to providers of financing3. total amount of financing

• price per share
• costs of PE inv.
• 3 inputs for LBO Model
• exit routes in PE

price = INV / share_vc

• pre money value
• exit value
• price per share
• post money value

key man clause (GP prohibited from making additional inv. until new key man selected)performance disclosure & confidentialityclawback (true up): if fund subsequently underperforms, GP required to pay back portion of early profitsdistribution waterfall: method in which profits distributed (deal by deal, total return method - after entire comitted capital returned to limited partners (LP) or value of portfolio exceeds invested cap. by some minimum amount)tag along, drag along clausesno-fault divorce (GP fire

• average life of PE
• corporate governance terms of PE fund
• costs of PE inv.
• terms of PE fund

10 to 12 yrs.

• exit routes in PE
• pre money value
• price per share
• average life of PE

1. ability to reengineer firm & operate efficiently2. ability to obtain favorable debt financing (reputation for efficient management and timely pmt of interests)3. superior alignment of interests between management & private equity ownership

• pre money valuation (VC)
• post money valuation (VC)
• risks of investing in PE
• sources of value creation in PE

NAV after distributions / paid in capital

• RVPI
• DPI
• LBO
• buyouts