Private equity

CFA Level II
#1

Is it easy for private equity to borrow than the public company? I think it is harder becuase it does not have much credit.

The Jefferson Group is a large private equity firm managing a multi-billion dollar portfolio. Which of the following is the least likely source of value-added the Jefferson Group would provide to its portfolio companies than a public firm would?

A) Aligning the interests between private equity owners and limited partners. B) Reengineering the portfolio companies. C) Obtaining cheap credit.

Your answer: C was incorrect. The correct answer was A) Aligning the interests between private equity owners and limited partners.

The three sources of value-added a private equity firm provides over public firms are: reengineering the portfolio firms, obtaining debt on favourable terms (cheap credit), and aligning the interests between private equity owners (the limited partners) and portfolio managers.

#2

Private equity firms have very good credit. They also have a good track record of paying their debt back in time.

Obtaining and repaying debt is part of their business.

Because of this they have easy access to debt capital on favourable terms.

#3

I think this is one of those questions that get you if you don’t read the question more carefully. Look for the wrong one. Answer a is align the interest bewtween equity providers and limited partners but should be align interest between equity providers and general partners