Private Equity & Venture Capital Flashcards

What is the significance of a 'MOIC' (Multiple on Invested Capital) of 3.0x versus a 30% IRR in evaluating PE performance?

Answer: MOIC measures total return magnitude while IRR measures return speed; both are needed for full performance assessment

MOIC captures total absolute return while IRR accounts for the time dimension; a high IRR on a short hold may produce lower MOIC than a longer hold with lower IRR.

In venture capital term sheets, what is the difference between 'full ratchet' and 'weighted average' anti-dilution?

Answer: Full ratchet adjusts conversion price to the lowest down-round price; weighted average considers relative size of the down round

Full ratchet provides maximum investor protection by repricing all prior shares to the down-round price, while weighted average is less punitive as it factors in round size.

Which type of private equity strategy typically operates with the shortest holding period and highest leverage?

Answer: Distressed debt investing

Distressed debt strategies often involve acquiring debt at a discount with shorter time horizons to restructuring outcomes, frequently using high leverage to amplify returns.

What is a 'SPAC' (Special Purpose Acquisition Company) and how does it relate to private equity exits?

Answer: A blank-check shell company that raises public capital to acquire a private company, providing an alternative IPO exit for PE-backed firms

SPACs offer PE-backed companies an alternative path to public markets by merging with a pre-funded shell company, often faster and more certain than a traditional IPO.

In the context of LP/GP relationships, what does 'clawback' mean?

Answer: The obligation of GPs to return excess carried interest if later fund losses reduce overall returns below the hurdle

Clawback provisions require GPs to return previously distributed carried interest if subsequent losses cause cumulative returns to fall below the hurdle rate.

What is 'dry powder' in private equity, and what are the implications of excessive industry-wide dry powder?

Answer: Uninvested committed capital; excess dry powder can drive up acquisition multiples due to competition for deals

Dry powder is committed but undeployed LP capital; when industry-wide levels are high, competition for quality assets intensifies, pushing valuation multiples upward.

A VC fund has a 2% management fee on committed capital of $200M and 20% carried interest above an 8% hurdle. If the fund returns $500M total, what is the approximate carried interest earned?

Answer: $60M

The hurdle requires returning committed capital plus 8% annually; roughly, carried interest is 20% of profits above the 8% hurdle, approximating to $60M on $300M profit after subtracting fees and hurdle.