CFM Private Equity & Venture Capital 4

Question 1

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

Accepted Answer

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

Answer

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.

Question 2

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

Accepted Answer

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

Answer

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.

Question 3

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

Accepted Answer

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

Answer

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.

Question 4

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

Accepted Answer

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

Answer

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

Question 5

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

Accepted Answer

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

Answer

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

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Private Equity & Venture Capital 4