Chapter 20 – Private Equity Issues and Opportunities
Q1. Describe the benefits and risks of an equity buyout compared to a leveraged buyout.
A. If companies can be acquired at a low enough cost, private equity funds may be
able to achieve high returns on their equity investment even without inifial
leverage. A private equity fund may also be able to avoid triggering a
Q2. Why were LBO funds so successful from 2002 through July 2007? Describe what has
happened since then.
A. LBO funds were very successful during 2002 through 2007 primarily because of
the low interest rate environment, which enabled them to lever up (i.e. 6x
EBITDA) and sfill achieve desired returns (20%-30% IRR). In addifion to interest
rates, easy access to capital (i.e., the huge volumes of money being pumped into
Q3. What is a possible negafive consequence of invesfing during private equity boom
cycles?
A. Ample credit and loose debt covenants can lead to a portfolio company having
too much debt on the balance sheet, which can become troublesome when the
Q4. From the perspecfive of exisfing LPs in a private equity fund, what are the benefits
and considerafions of annex funds?
A. The two main considerafions for an LP are dilufion and potenfially higher
exposure to a fund. Annex funds may bring in new investors at more favorable
terms which can dilute the current LPs. In addifion, if an exisfing LP decides to
Q5. Explain the advantages of private equity funds partnering with strategic buyers.
A. When private equity funds find it difficult to compete with large corporafions in
bidding wars for target companies, partnering with these corporafions eliminates
this problem while also providing private equity funds with a built in exit strategy.
Q6. A=er inifially finding success in M&A advisory businesses, what issues have arisen for
private equity firms in this arena?
A. Private equity firms with M&A advisory services have run into conflict of interest
Q7. Annex funds a<empt to address which of the principal risks outlined in Blackstone’s
IPO prospectus (Exhibit 20.10)?
A. New investments and exifing – helps provide capital for new investments when
Q8. Discuss “mulfiple expansion” in the context of value creafion for private equity
investments made following a financial crisis.
A. Private equity firms are able to buy assets at historically low mulfiples. Assuming
the markets are healthier in three to seven years, there is a high likelihood funds
Q9. How have limited partners ufilized the secondary market to parficipate in private
equity?
A. The secondary market allows LP’s to liquidate their shares in private equity funds
when they need cash or when they have lost confidence that the GP can