CAIA LEVEL I - CHAPTER 23 EQUITY TYPES OF PRIVATE EQUITY WITH 100% CORRECT ANSWERS

20-bagger - indicates a company that appreciates in value 20-fold compared to the cost of the venture capital investment. angel investing - refers to the earliest stage of venture capital, in which investors fund the first cash needs of an entrepreneurial idea. auction process - involves bidding among several private equity firms, with the deal going to the highest bidder. buy-and-build strategy - refers to the buying of a platform company with a well-developed management team and infrastructure, and then using those capabilities to acquire one or more add on companies to build out and grow the platform. buy-in management buyout - a form of a leveraged buyout (LBO) that incorporates characteristics of both a management buyout and a management buy-in. - occurs when existing management — along with outside managers — decides to buy out a company. - The existing management represents the buyout portion while the outside managers represent the buy-in portion. buyout-to-buyout deal - takes place when a private equity firm sells one of its portfolio companies to another buyout firm. capital calls - options for the manager to demand, according to the subscription agreement, that investors contribute additional capital. club deal - a private equity buyout or the assumption of a controlling interest in a company that involves several different private equity firms. - This group of firms pools its assets together and makes the acquisition collectively. - The practice has historically allowed private equity to purchase much more expensive companies together than they could alone. - Also, with each company taking a smaller position, risk can be reduced. committed capital - the cash investment that has been promised by an investor but not yet delivered to the fund. compound option - an option on an option. - In other words, it allows its owner the right but not the obligation to pay additional money at some point in the future to obtain an option. - Therefore, there are two strike prices and two exercise dates. - They are available for any combination of calls and puts. entrepreneurship stimulators - LBOs that create value by helping to free management to concentrate on innovations. escrow agreement - type of agreement whereby a portion of the manager's incentive fees are held in a segregated account until the entire fund is liquidated. expansion stage venture capital - stage of venture capital focused on filling the cash flow deficiency once commercial viability is established. golden parachute - consists of substantial benefits given to top executives if the company is taken over by another firm and the executives are terminated as a result of the merger or takeover. J-curve - the classic illustration of the early losses and later likely profitability of venture capital. limited liability - a type of legal structure for an organization where a corporate loss will not exceed the amount invested in a partnership or limited liability company. - investors' and owners' private assets are not at risk if the company fails. - one of the biggest advantages of investing in publicly listed companies. management buy-in (MBI) a type of LBO in which the buyout is led by an outside management team but leaves the existing management team in place. management buyout (MBO) - a buyout that is led by the target firm's current management. - a company's management team purchases the assets and operations of the business. - done so a company can go private in an effort to streamline operations and improve profitability mezzanine venture capital - funding stage before a start-up company goes public or is sold to a strategic buyer. milestone - a set of goals that must be met to complete a phase and usually denotes when the entrepreneur will be eligible for the next round of financing. secondary buyout - private equity firm sells its investment in a company to another private equity firm, thereby ending its involvement with the company. - Historically perceived as "panic" sales and, thus, sometimes hard to consummate. seed capital stage - the first stage where VC firms invest their capital into a venture and is typically prior to having established the viability of the product. sourcing investments - the process of locating possible investments (i.e., generating deal flow), reading business plans, preparing intense due diligence on start-up companies, and determining the attractiveness of each start-up company. turnaround strategy - an approach used by LBO funds that look for underperforming companies with excessive leverage or poor management. venture capital fund - investment funds that manage the money of investors who seek private equity stakes in startup and small- to medium-sized enterprises with strong growth potential. - These investments are generally characterized as high-risk/high-return opportunities. conglomerate - a corporation made up of a number of different, seemingly unrelated businesses. - one company owns a controlling stake in a number of smaller companies which conduct business separately. - the largest ones diversify business risk by participating in a number of different markets, although some , such as those in mining, elect to participate in a single industry. Early Stage Venture Capital - Investments in firms that are in the infancy stages of developing products or services - potential investors: founders, friends, family, incubators, venture capital companies, and more. One of the most common types of investors participating in seed funding is a so-called "angel investor." - usually investments are less than 5m Exit Plan - a contingency plan that is executed by an investor, trader, venture capitalist or business owner to liquidate a position in a financial asset or dispose of tangible business assets once certain predetermined criteria for either has been met or exceeded. first stage venture capital - Growth stage investments focus on companies that have a proven business model and either are already profitable or offer a clear path to sustainable profitability. - These investments tend to be in the $5-20 million range and are intended to help the company increase its market penetration significantly. - More investors are willing to participate in investment rounds at this stage.