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2011 CFA Program Curriculum: Level 2, Volume 5

CFA Institute

Chapter 49

PRIVATE EQUITY VALUATION - all with Video Answers

Educators


Chapter Questions

Problem 1

- Jo Ann $\mathrm{Ng}$ is a senior analyst at SING INVEST, a large regional mid-market buyout manager in Singapore. She is considering the exit possibilities for an existing investment in a mature automotive parts manufacturer that was acquired 3 years ago at a multiple of 7.5 times EBITDA. SING INVEST originally anticipated exiting its investment in China Auto Parts, Inc. within 3 to 6 years. Ng noted that current market conditions have deteriorated and that companies operating in a similar business trade at an average multiple of 5.5 times EBITDA. She deemed, however, based on analyst reports and industry knowledge that the market is expected to recover strongly within the next two years because of the fast increasing demand for cars in emerging markets. Upon review of market opportunities, $\mathrm{Ng}$ also noted that China Gear Box, Inc., a smaller Chinese auto parts manufacturer presenting potential strong synergies with China Auto Parts, Inc., is available for sale at an EBITDA multiple of 4.5. Exits by means of an IPO or a trade sale to a financial or strategic (company) buyer are possible in China. How would you advise $\mathrm{Ng}$ to enhance value upon exit of China Auto Parts?

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Problem 2

Wenda Lee, CFA, is a portfolio manager at a U.K.-based private equity institutional investor. She is considering an investment in a mid-market European buyout fund to achieve a better diversification of her firm's existing private equity portfolio. She short listed two funds that she deemed to have a similar risk return profile. Before deciding which one to invest in, she is carefully reviewing and comparing the terms of each fund.
$$
\begin{array}{lll}
& \text { Mid-Market Fund A } & \text { Mid-Market Fund B } \\
\hline \text { Management fees } & 2.5 \% & 1.5 \% \\
\text { Transaction fees } & 100 \% \text { to the GP } & 50-50 \% \text { split } \\
\text { Garried interest } & 15 \% & 20 \% \\
\text { Hurdle rate } & 6 \% & 9 \% \\
\text { Clawback provision } & \text { No } & \text { Yes } \\
\text { Distribution waterfall } & \text { Deal-by-deal } & \text { Total return } \\
\hline
\end{array}
$$
Based on the analysis of terms, which fund would you recommend to Lee?

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Problem 3

Jean Pierre Dupont is the CIO of a French pension fund allocating a substantial portion of its assets to private equity. The existing private equity portfolio comprises mainly large buyout funds, mezzanine funds, and a limited allocation to a special situations fund. The pension fund decided to further increase its allocation to European venture capital. The investment committee of the pension fund requested Dupont present an analysis of five key investment characteristics specific to venture capital relative to buyout investing. Can you assist Dupont in this request?

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Problem 4

Discuss the ways that private equity funds can create value.

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01:27

Problem 5

What problems are encountered when using comparable publicly traded companies to value private acquisition targets?

Prashant Bana
Prashant Bana
Numerade Educator

Problem 6

What are the main ways in which the performance of private equity limited partnerships can be measured A) during the life of the fund, and B) once all investments have been exited?

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