Private Equity & Venture Capital Flashcards

In private equity, what is a 'portfolio company add-on acquisition' (also called a 'bolt-on')?

Answer: A smaller acquisition made by an existing portfolio company to expand its capabilities or market share

Add-on acquisitions are smaller companies purchased by an existing PE portfolio company to build scale, enter new markets, or add capabilities under the 'buy-and-build' strategy.

What is a 'subscription line of credit' (also called a 'capital call facility') used for in private equity funds?

Answer: To allow the fund to borrow against LP commitments before calling capital, improving IRR metrics

Subscription lines allow PE funds to borrow short-term against LP commitments, delaying capital calls and artificially inflating IRR by shortening the time capital is deployed.

Which of the following best describes a 'continuation fund' in private equity?

Answer: A vehicle that allows a GP to transfer select portfolio assets into a new fund when the original fund term ends

Continuation funds allow GPs to extend ownership of high-performing assets beyond the original fund's term by moving them into a new vehicle, offering LPs the choice to exit or roll over.

The 'Rule of 72' is applied in private equity primarily to:

Answer: Quickly estimate the number of years required to double an investment at a given annual return rate

Dividing 72 by the annual return rate gives an approximate number of years for an investment to double, useful for quick mental valuation checks.

What is 'deal sourcing' in the context of private equity, and why is it a key competitive differentiator?

Answer: Identifying and accessing investment opportunities, often before they reach competitive auction processes

Proprietary deal sourcing allows PE firms to negotiate directly with sellers before competitive auctions, often resulting in better pricing and more favorable deal terms.

In venture capital, what does 'pro-rata rights' entitle an existing investor to do?

Answer: Maintain their ownership percentage by investing in future funding rounds

Pro-rata rights allow existing investors to participate in future funding rounds at their proportional ownership level, preventing dilution of their stake.

A PE-backed company has $100M in debt and generates $15M in free cash flow annually. After 5 years of cash flow sweep, what is the remaining debt balance assuming all FCF goes to debt repayment?

Answer: $25M

Five years at $15M annual repayment totals $75M in debt paydown, leaving $100M - $75M = $25M remaining.