Private Equity Application Quiz!

1. Match the business type with the best description of its primary activities.

Private equity group

Investment bank

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2. Select the most appropriate description of the strategy described below: A company acquires a controlling interest in another company using mostly debt to finance the purchase. The acquiring company (or companies) normally put up a very small amount of equity to close the deal, as well as a very large amount of debt. The assets of the company that is being acquired are used as collateral for the debt being used to finance the transaction. If the deal goes through, then a large amount of debt that was used to complete the transaction will be paid off using the cash flow or assets of the acquired company.

Growth capital

Venture capital

Investment banking

Leveraged buyout

A leveraged buyout is a strategy where a company acquires another company by using a significant amount of debt to finance the purchase. In this strategy, the acquiring company only contributes a small amount of equity while relying heavily on debt. The assets of the acquired company serve as collateral for the debt used in the transaction. If the deal is successful, the acquired company's cash flow or assets will be used to pay off the debt used in the transaction.

Explanation

A leveraged buyout is a strategy where a company acquires another company by using a significant amount of debt to finance the purchase. In this strategy, the acquiring company only contributes a small amount of equity while relying heavily on debt. The assets of the acquired company serve as collateral for the debt used in the transaction. If the deal is successful, the acquired company's cash flow or assets will be used to pay off the debt used in the transaction.

3. Investment banking is typically an advisory/capital raising service, while private equity is an investment business.

True

False

Investment banking is a financial service that primarily focuses on providing advisory and capital raising services to corporations, governments, and other institutions. On the other hand, private equity is an investment business that involves investing in companies and acquiring ownership stakes. This statement correctly distinguishes between the two, stating that investment banking is primarily an advisory and capital raising service, while private equity is an investment business. Therefore, the answer "True" is correct.

Explanation

Investment banking is a financial service that primarily focuses on providing advisory and capital raising services to corporations, governments, and other institutions. On the other hand, private equity is an investment business that involves investing in companies and acquiring ownership stakes. This statement correctly distinguishes between the two, stating that investment banking is primarily an advisory and capital raising service, while private equity is an investment business. Therefore, the answer "True" is correct.

4. On average, a private equity group looks at around 100 opportunities to make one deal.

True

False

Private equity groups typically evaluate numerous opportunities before deciding to make an investment. This is because they have specific criteria and standards that need to be met in order to ensure a successful deal. By reviewing a large number of opportunities, they can carefully select the most promising ones that align with their investment strategies and goals. Therefore, it is true that a private equity group typically looks at around 100 opportunities to make one deal.

Explanation

Private equity groups typically evaluate numerous opportunities before deciding to make an investment. This is because they have specific criteria and standards that need to be met in order to ensure a successful deal. By reviewing a large number of opportunities, they can carefully select the most promising ones that align with their investment strategies and goals. Therefore, it is true that a private equity group typically looks at around 100 opportunities to make one deal.

5. Which of the following is the least likely objection to be raised by a private equity prospect?

We do all our industry research in-house

Your reports are not niche enough for the industries we target

The industry reports do not have the level of detail that we require

We never have any use for industry information

The least likely objection to be raised by a private equity prospect is "We never have any use for industry information." This is because industry information is crucial for private equity firms to make informed investment decisions. It helps them understand market trends, competitive landscape, and potential risks and opportunities in the industry they are targeting. Private equity firms heavily rely on industry research to assess investment opportunities and create value in their portfolio companies. Therefore, it is highly unlikely for a private equity prospect to claim that they never have any use for industry information.

Explanation

The least likely objection to be raised by a private equity prospect is "We never have any use for industry information." This is because industry information is crucial for private equity firms to make informed investment decisions. It helps them understand market trends, competitive landscape, and potential risks and opportunities in the industry they are targeting. Private equity firms heavily rely on industry research to assess investment opportunities and create value in their portfolio companies. Therefore, it is highly unlikely for a private equity prospect to claim that they never have any use for industry information.

6. The breadth of IBISWorld's Industry report collection helps private equity clients by giving them access to a large collection of supply chain information. How is this most useful to private equity clients?

Helps them make well-informed procurement decisions.

Introduces them to industry jargon.

Helps them to "stress-test" their portfolio.

Allows them to get the complete picture of a firm’s business environment.

The breadth of IBISWorld's Industry report collection provides private equity clients with access to a large collection of supply chain information. This enables them to gather comprehensive information about a firm's business environment, including factors such as market trends, competitive landscape, and potential risks. By obtaining a complete picture of the firm's business environment, private equity clients can make more informed investment decisions and assess the potential impact on their portfolio.

Explanation

The breadth of IBISWorld's Industry report collection provides private equity clients with access to a large collection of supply chain information. This enables them to gather comprehensive information about a firm's business environment, including factors such as market trends, competitive landscape, and potential risks. By obtaining a complete picture of the firm's business environment, private equity clients can make more informed investment decisions and assess the potential impact on their portfolio.

7.

Read the following information about how we help Harvest Capital Credit, one of our private equity clients: Key reports and sections: iExpert, Key External Drivers, Key Success Factors, and Key Statistics. Unbiased information: Uncover industry threats and opportunities, and expected future performance from a credible and unbiased source, that a company may not be forthcoming about. Crosscheck applicant's books: Applications can be biased as trying to make the company look the best it can, our reports help to paint the whole picture for industry performance to make a more informed decision. Which of the following is not a key way that IBISWorld helps Harvest Capital Credit?

IBISWorld Industry data, in conjunction with client metrics, helps HCC to price loans

IBISWorld provides a credible and unbiased source to help uncover threats and opportunities

The correct answer is "IBISWorld Industry data, in conjunction with client metrics, helps HCC to price loans." This is not a key way that IBISWorld helps Harvest Capital Credit because the information provided in the passage does not mention anything about using IBISWorld data to price loans. The passage only mentions that IBISWorld provides unbiased information to uncover threats and opportunities and helps to paint the whole picture of industry performance for a more informed decision-making process.

Explanation

The correct answer is "IBISWorld Industry data, in conjunction with client metrics, helps HCC to price loans." This is not a key way that IBISWorld helps Harvest Capital Credit because the information provided in the passage does not mention anything about using IBISWorld data to price loans. The passage only mentions that IBISWorld provides unbiased information to uncover threats and opportunities and helps to paint the whole picture of industry performance for a more informed decision-making process.

8. Which of the following is among the most common investment strategies in private equity?

Leveraged buyouts

Audit & assurance

Venture capital

Distressed investmets

Corporate banking

Leveraged buyouts, venture capital, and distressed investments are among the most common investment strategies in private equity. Leveraged buyouts involve acquiring a company using a significant amount of borrowed money. Venture capital refers to investing in startups and small businesses with high growth potential. Distressed investments involve purchasing assets or securities of companies that are in financial distress. These strategies are popular in private equity as they offer opportunities for high returns on investment.

Explanation

Leveraged buyouts, venture capital, and distressed investments are among the most common investment strategies in private equity. Leveraged buyouts involve acquiring a company using a significant amount of borrowed money. Venture capital refers to investing in startups and small businesses with high growth potential. Distressed investments involve purchasing assets or securities of companies that are in financial distress. These strategies are popular in private equity as they offer opportunities for high returns on investment.

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9. Which of the following best describes mezzanine investment?

Refers to investments in the equity or debt of temporarily financially stressed firms (that are sound over the medium-term).

Refers to funding a company prior to its start up, or during its early life cycle.

Mezzanine investment refers to debt capital that gives the lender the right to convert to an ownership interest in a firm if the loan is not paid back on time and in full. This means that if the borrower fails to repay the loan according to the agreed terms, the lender has the option to convert their debt into equity ownership in the company. This type of investment is often used to provide additional financing to a company and offers the lender the potential for higher returns if the company performs well.

Explanation

Mezzanine investment refers to debt capital that gives the lender the right to convert to an ownership interest in a firm if the loan is not paid back on time and in full. This means that if the borrower fails to repay the loan according to the agreed terms, the lender has the option to convert their debt into equity ownership in the company. This type of investment is often used to provide additional financing to a company and offers the lender the potential for higher returns if the company performs well.

10. When economic conditions are good, private equity groups are more likely to venture outside their niche – providing us an opportunity to sell.

True

False

During good economic conditions, private equity groups tend to focus on their niche rather than venturing outside of it. This is because they are more confident in the success of their investments within their specialized area. Therefore, the statement that economic conditions being good leads to private equity groups venturing outside their niche is false.

Explanation

During good economic conditions, private equity groups tend to focus on their niche rather than venturing outside of it. This is because they are more confident in the success of their investments within their specialized area. Therefore, the statement that economic conditions being good leads to private equity groups venturing outside their niche is false.

11. How do private equity firms generally receive a return on their investment?

An IPO, when the firm is offered for sale to the public

Merger or acquisition, when a company is sold for cash or shares in another company

Transfer pricing, the setting of the price for goods and services sold between controlled legal entities within an enterprise

Recapitalization, when cash or debt is raised against future cash flow

Private equity firms generally receive a return on their investment through various means. One way is through an IPO, where the firm is offered for sale to the public. Another way is through a merger or acquisition, where the company is sold for cash or shares in another company. Recapitalization is also a method, where cash or debt is raised against future cash flow. These different strategies allow private equity firms to generate returns on their investments.

Explanation

Private equity firms generally receive a return on their investment through various means. One way is through an IPO, where the firm is offered for sale to the public. Another way is through a merger or acquisition, where the company is sold for cash or shares in another company. Recapitalization is also a method, where cash or debt is raised against future cash flow. These different strategies allow private equity firms to generate returns on their investments.

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12. Which of the following are questions that help BDMs understand the needs of private equity prospects?

Do you have any uncommitted funds at the moment?

How do your Credit Analysts assess whether the loan applicant’s evidence is credible?

What marketing tools are you currently using?

How do you monitor your portfolio of investments?

How many prospects do you research to identify attractive business opportunities?

The correct answer is: Do you have any uncommitted funds at the moment?, How do you monitor your portfolio of investments?, How many prospects do you research to identify attractive business opportunities?

These questions are relevant for BDMs (Business Development Managers) to understand the needs of private equity prospects. Asking about uncommitted funds helps determine the availability of funds for potential investments. Inquiring about portfolio monitoring provides insights into the prospect's investment management practices. Lastly, asking about the number of prospects researched indicates the level of effort put into identifying attractive business opportunities.

Explanation

The correct answer is: Do you have any uncommitted funds at the moment?, How do you monitor your portfolio of investments?, How many prospects do you research to identify attractive business opportunities?

These questions are relevant for BDMs (Business Development Managers) to understand the needs of private equity prospects. Asking about uncommitted funds helps determine the availability of funds for potential investments. Inquiring about portfolio monitoring provides insights into the prospect's investment management practices. Lastly, asking about the number of prospects researched indicates the level of effort put into identifying attractive business opportunities.

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13. If a private equity prospect asks who IBISWorld's main competitors are, which of the following could you include in your response?

There are no other companies producing Industry research.

Clients say First Research meets certain needs, but is designed for sales teams. IBISWorld is more tailored to PEG needs.

The correct answer includes two statements that explain the competitors of IBISWorld. The first statement mentions that there are similar companies, but none with the same breadth and range of industry research that IBISWorld produces. This suggests that while there may be other companies in the industry, IBISWorld stands out due to the comprehensive nature of its research. The second statement mentions that clients say First Research meets certain needs but is designed for sales teams, while IBISWorld is more tailored to private equity group (PEG) needs. This suggests that First Research may be a competitor in some aspects, but IBISWorld has an advantage when it comes to serving PEGs.

Explanation

The correct answer includes two statements that explain the competitors of IBISWorld. The first statement mentions that there are similar companies, but none with the same breadth and range of industry research that IBISWorld produces. This suggests that while there may be other companies in the industry, IBISWorld stands out due to the comprehensive nature of its research. The second statement mentions that clients say First Research meets certain needs but is designed for sales teams, while IBISWorld is more tailored to private equity group (PEG) needs. This suggests that First Research may be a competitor in some aspects, but IBISWorld has an advantage when it comes to serving PEGs.

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