CFM Private Equity & Venture Capital 3

Question 1

In venture capital, what is a 'participating preferred' structure?

Accepted Answer

Preferred investors receive their liquidation preference AND then share in remaining proceeds with common shareholders

Answer

Participating preferred allows VC investors to first recover their investment, then share in remaining proceeds alongside common stockholders, unlike non-participating preferred.

Question 2

Which exit strategy typically provides private equity investors with the most control over timing and pricing of their exit?

Accepted Answer

Secondary buyout

Answer

Secondary buyouts (selling to another PE firm) allow sellers to control timing and negotiate pricing directly, unlike IPOs which depend on market conditions.

Question 3

What is the primary purpose of a 'ratchet' mechanism in a private equity deal?

Accepted Answer

To allow management to earn additional equity if performance targets are achieved

Answer

A ratchet aligns management incentives by granting them additional equity ownership when they achieve or exceed agreed financial performance targets.

Question 4

Series A, B, and C funding rounds in venture capital primarily differ by:

Accepted Answer

The stage of company development and typical capital amounts raised

Answer

Later series represent more mature stages of development with larger capital raises and typically higher valuations, reflecting reduced early-stage risk.

Question 5

In a private equity LBO model, 'financial engineering' refers to:

Accepted Answer

Using leverage and capital structure optimization to enhance equity returns

Answer

Financial engineering in LBOs involves optimizing the debt-equity mix and debt repayment to amplify equity returns beyond what operational improvements alone would generate.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Private Equity & Venture Capital 3