CFM Private Equity & Venture Capital 5

Question 1

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

Accepted Answer

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

Answer

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.

Question 2

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

Accepted Answer

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

Answer

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.

Question 3

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

Accepted Answer

Distressed debt investing

Answer

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

Question 4

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

Accepted Answer

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

Answer

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.

Question 5

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

Accepted Answer

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

Answer

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

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Private Equity & Venture Capital 5