PE(VC and LBO) basic Q

CFA Level II
#1

Analysts Jordan Green and Noelle Lafonte are discussing terminal value estimation in venture capital and buyout investments. Lafonte states: “Private equity firms often use scenario analysis in both venture capital and buyout investments to estimate terminal value.” Green adds: “Private equity firms only use the multiple of net income approach in leveraged buyout (LBO), but not in venture capital investments to estimate terminal value.” With respect to their statements: A) Green is correct but Lafonte is incorrect. B) Lafonte is correct but Green is incorrect. C) Neither Lafonte nor Green is incorrect.

#2

A? All I can remember about this VC/LBO stuff is - VC is risker.

#3

I’d say A, too - there aren’t any comparables for VC firms anyway, right? So you can’t really use multiples.

#4

A for sure

#5

C

#6

B

#7

B… I don’t think that multiple of NI is the only approach the PE Firms use

#8

Jut checked the notes: to get terminal value, 1) multiples and DCF for LBO; 2) scenario analysis for VC. work for LBO, too? To value the portfolio firm, 1) equity CF and target IRR 2) Pre-money for VC. Not much left in my memory.

#9

A

#10

I’d go A.

#11

I think it’s A as well.

#12

b

#13

Id say B, but i really dunno…

#14

Elaborating on my answer - the cash flows for an LBO are usually known so we can just use a multiple to come up with a terminal value. VC’s however are unpredictable, so scenario analysis would be good to use to determine the likely outcomes.

#15

Correct ans is B. (I was with A too.)

#16

swaptiongamma Wrote: ------------------------------------------------------- > Correct ans is B. (I was with A too.) Can you post an explanation? I half guessed this answer and half remembered stuff from the A.A. reading.

#17

Sigh. If they test PE I’m screwed…

#18

I thought we always estimate terminal value for buyout and not for VC and multiples can only be used with LBO. Answer was totally the opposite. Sigh! No Qbank at work buddy, so no explanations.

#19

Argh, apparently I gave the exact same answer when I did this last week: Your answer was incorrect. The correct answer was: Lafonte is correct but Green is incorrect. Lafonte’s statement is correct. Private equity firms can use scenario analysis to estimate terminal value in both venture capital and LBO investments. Under scenario analysis, terminal values are calculated under multiple scenarios using different assumptions. Green’s statement is incorrect. Private equity firms often use a relative value approach to estimate terminal value in both venture capital and LBO investments. Under the multiple of net income approach, terminal year net income is multiplied by the P/E ratio to project terminal equity value.

#20

if you chose B, you guys are interpreting Green’s statement wrong. Green is not saying net income multiples are the only method. he is saying that the net income multiple method is only used in LBO, and not in VC.