1)
The market for asset management:
You are
a
successful hedge fund manager
who has
made 20-30% annual returns over the past 10 years. You are raising
a
new fund and investors
want to put more money in than you really want to raise.
a.
Why would you consider not raising as much money as possible given that you
can earn management fees on all assets under management?
b.
What are your options
to resolve the imbalance between fund size and investor
demand, under which circumstances would you go for which one?
2)
A
distressed firm’s capital structure includes $100m
in face value of subordinated
bonds and $50m in face value in senior bonds (all unsecured). The bankruptcy court has
received two conflicting valuations of the firm’s assets: valuation
A
estimates
a
value of
$55m,
valuation
B
values the assets at $90m. (The firm is
not
liquidated, the valuation will
only be used to determine the stake
of each claimant post-restructuring!)
i.
Which valuation would
a
senior creditor like the court to apply and why?
ii.
The court assigns equity stakes to viable claims
proportionately according
to the applied valuation (no debt post-restructuring). For each valuation
considered by the court, what ownership stake (in
%
of the firm) does
an investor
holding $10m in subordinated face value
get? If the firm is sold after restructuring
for $75m, what’s their return (in %) in each case if they bought the debt at
25c/$?
iii.
Repeat 1)c.ii. for
a
case in which
subordinated
debt is
secured
by collateral
valued at $20m (part of the overall value and equal in
valuations
A
and B).
b.
You are the LP in
a
PE fund, and the GPs offer you the option to apply their 20%
carry to the whole fund, or to each deal individually. What do you choose and why?
3)
Venture capital: GenericStartup.com has 900 shares outstanding before raising $1m in
Series
A
at
a
pre-money valuation of $9m. It later raises $5m in Series
B
at
a
post-money valuation
of $25m.
Both rounds are for
participating convertible preferred stock
(1x liquidation
preference),
and B’s liquidation preference is senior to A’s.
a.
How many shares can
Series
B
investors convert into?
b.
Plot the payoff to
Series
A
investors as
a
function of the asset value in
a
trade sale
(no IPO). Clearly label all kinks and slopes in the diagram.
(There will be partial credit)
c.
What is the founder’s payoff (owning 900 shares) in
a
$50m IPO (after Series B)?
d.
Why do VC investors use
preferred stock (i.e., with liquidation preference)?
e.
What is the downside (for the VC) to too high liquidation preferences?