University of Waterloo

• AFM MISC

• AFM 377 – Private Equity and Venture Capital Class #2: Private Equity Industry Overview Quiz #1 Review Prepared and Presented by Steve Balaban 1 2 Highlighted Concepts 3 An attractive LBO candidate can have a strong management team or a management team that has misaligned interests with shareholders Limited partnership agreements (LPAs) are agreements between the general partner (GP) and multiple limited partners (LPs) A catch-up clause gives the GP 100% of distributions after the hurdle rate has been exceeded, until the GP receives 20% of profits... And it isn’t always included in the agreement. ✔ Quiz #1 Review Prepared and Presented by Steve Balaban Catch-up Clauses  A catch-up clause is a provision that allows the GP to receive 100% of distributions (after a specific hurdle rate has been exceeded) until the profits are split according to a determined percentage (e.g., 20% if a 2/20 compensation structure is being used)  Every dollar thereafter is split 80/20 between the LPs and the GP  How are profits split if an investment earns a 20% IRR, the hurdle rate is 8%, and a catch-up clause exists? What if there is no catch-up clause? Quiz #1 Review Prepared and Presented by Steve Balaban GP profits with a catch-up clause GP profits without a catch-up clause Entirely for LPs Entirely for GP Remaining 10% is split 80/20 GP earns 4.0% (20% * 20%) GP earns 2.4% ((20% - 8%) * 20%) Entirely for LPs No catch-up clause Remaining 12% is split 80/20  Assume a 20% IRR and an 8% hurdle rate Catch-up Clauses Private Equity Overview  What are alternative investments?  What is private equity?  What is the difference between venture capital and buyouts?  Who invests in private equity?  Who are the biggest private equity firms?  What is a private equity limited