1. With a background in the sector gained as a consultant with a major professional services firm you are considering raising a new venture capital fund to invest in digital health technology and medical equipment and devices. (a) Describe how you might go about raising this fund including who you would approach as potential investors in the fund, which type of adviser that you might involve in the fund-raising process and the various steps and proposed timeline for the fund raising. (20 marks) (b) Explain what you would include in the executive summary of the document that you would use to market the fund to potential investors. (5 marks) (c) Explain what you would include in the “track record” section of this document and provide an example of a tabular summary statement of a fund’s track record. (10 marks) (d) Explain why it may be more difficult to raise this first-time fund than a subsequent fund. (5 marks) (e) What is the difference between “allocated capital” and “committed capital”? (5 marks) (f) Explain what is meant by a “first close” and why it is usually easier to complete the fund raising once a first close has been reached. (5 marks) (50 marks total)
Answer any TWO out of the following FOUR questions (total 100 marks)
1. With a background in the sector gained as a consultant with a major
professional services firm you are considering raising a new venture
capital fund to invest in digital health technology and medical
equipment and devices.
(a) Describe how you might go about raising this fund including who
you would approach as potential investors in the fund, which type of
adviser that you might involve in the fund-raising process and the
various steps and proposed timeline for the fund raising. (20 marks)
(b) Explain what you would include in the executive summary of the
document that you would use to market the fund to potential
investors. (5 marks)
(c) Explain what you would include in the “track record” section of
this document and provide an example of a tabular summary
statement of a fund’s track record. (10 marks)
(d) Explain why it may be more difficult to raise this first-time fund
than a subsequent fund. (5 marks)
(e) What is the difference between “allocated capital” and
“committed capital”? (5 marks)
(f) Explain what is meant by a “first close” and why it is usually easier
to complete the fund raising once a first close has been reached.
(5 marks)
(50 marks total)
2. As a partner with a venture capital firm that specialises in the food and
hospitality sector you have received a business plan from a
management team that is aiming to raise finance to start-up a chain of
premium burger restaurants.
(a) Explain, in some detail, how you would go about appraising this
investment opportunity from receipt of the business plan to issuing an
offer letter (term sheet) (20 marks)
IC 309 2021/22 A 800
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(b) How would you arrive at a valuation for the business and the
equity stake that you would require (use a numerical example to
illustrate your answer)? (15 marks)
(c) Why might you hold equity as preference shares rather than
ordinary shares? (5 marks)
(d) Explain the purpose of the term sheet and whether it is a binding,
legal contract in any way. (7 marks)
(e) What is meant by the term “consent rights”? (3 marks)
(50 marks total)
3. Over the past year private equity firms have been extremely active in
financing management buy-outs (MBOs) of underperforming or
undervalued businesses.
(a) Describe the criteria that a private equity firm would look for in a
potential MBO opportunity. (10 marks)
(b) What risk factors might pertain to a private equity investment in
the pandemic? (9 marks)
(c) Explain how a MBO deal is usually structured both in terms of its
corporate / legal structure and its financial structure. (10 marks)
(d) If a private equity firm is considering investing in the MBO of a
supermarket chain describe in detail the areas of external
commercial due diligence, management due diligence and financial
due diligence that should be carried out, making your answer
specific to the supermarket sector (15 marks)
(e) What options would be available to the private equity firm if the
due diligence revealed some issues? (6 marks)
(50 marks total)
IC 309 2021/22 A 800
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4. (a) Explain the difference between a seed investment and a start-up
investment and how they compare on risk considerations. (6 marks)
(b) Both of these stages of investment are often financed initially by
business angels. Explain the difference between a financial return
business angel and a professional entrepreneur business angel.
(8 marks)
(c) Why might a venture capitalist be keen to invest in a company that
has already received a first round of business angel investment?
(5 marks)
(d) Explain why an anti-dilution clause might be included in the
investment agreement between the venture capitalist and / or business
angel and the company receiving the investment. (4 marks)
(e) Following investment explain how both business angels and venture
capitalists would go about monitoring an investment (11 marks)
(f) In what ways might they seek to add value to an investment prior to
exit? (6 marks)
(g) Explain why it is necessary to exit from an investment and list the pros
and cons to both a venture capitalist investor and the company’s
management team of exiting via a trade sale and via a stock market
flotation / IPO.
(10 marks).
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