Private Equity & Venture Capital Flashcards
7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Private Equity & Venture Capital flashcards as text
In a leveraged buyout (LBO), which financial metric is most critical to assess a target company's ability to service acquisition debt?
Answer: EBITDA margin
EBITDA margin reflects operating cash flow generation, which determines the company's capacity to service LBO debt obligations.
A venture capital firm uses a '10x return' target for individual investments. If the portfolio has a 90% failure rate, the fund can still achieve positive returns primarily because of:
Answer: The power law distribution where a few winners generate outsized returns
VC portfolios follow a power law where one or two breakout investments can return multiples of the entire fund, compensating for the many failures.
What is a 'drag-along' provision in a private equity shareholder agreement?
Answer: A clause requiring minority shareholders to sell their shares if majority shareholders approve a sale
Drag-along rights allow majority shareholders to compel minority shareholders to join a sale transaction on the same terms.
Which stage of private equity investment typically carries the highest risk but also the highest potential return?
Answer: Seed/angel stage
Seed/angel stage investments carry the highest risk due to unproven business models, but offer the greatest upside if the company succeeds.
In private equity fund accounting, the 'J-curve effect' refers to:
Answer: Initial negative returns due to fees and early losses before investments mature
The J-curve describes how PE funds typically show negative returns in early years due to fees and write-downs before generating positive returns as investments mature.
A PE firm acquires a company at 6x EBITDA and exits at 9x EBITDA. If EBITDA grows 50% during the holding period, what is the primary driver of the 'multiple expansion' component of returns?
Answer: The 3x increase in the exit multiple compared to entry
Multiple expansion specifically refers to the increase in the valuation multiple (from 6x to 9x), independent of EBITDA growth.
What does 'anti-dilution protection' in a venture capital term sheet protect against?
Answer: Reduction in an investor's ownership percentage when new shares are issued at a lower valuation
Anti-dilution provisions protect early investors from dilution when later financing rounds occur at lower valuations (down rounds).