Tutorial 8

Question 1

Strategic Asset Allocation

Answer 1

Long-term targets of the portfolio concerning risk and return.

Question 2

Tactical asset allocation

Answer 2

Stipulates the degree of liberty to divert from the strategic asset allocation to capitalize on temporary market inefficiencies or account for relevant changes in the overall context.

Question 3

What is the ex-post problem in PE?

Answer 3

We obtain relevant information only when the fund is mature and the market is not liquid anymore.

Question 4

Systematic risk

Answer 4

• arises from the effects of the market or economy. Cannot be reduced through diversification.

Question 5

Unsystematic risk

Answer 5

• arises from firm or industry-specific conditions. Can be reduced by diversification.

Question 6

What is a co-investment?

Answer 6

Syndication of a financing round between a private equity fund and one or more of its limited partners.

Question 7

Pros of co-investment

Answer 7

• unites complementary capabilities (financial resources and technology knowledge) –> reduced information asymmetry
• LPs do not have to pay carried interest and management fees –> enhanced return profile
• Allows for faster investments where fund raising is difficult

Question 8

When is there outperformance of co-investments over fund returns?

Answer 8

If LP builds portfolios of co-investments to regain benefit from diversification and negotiate favorable terms to gain fee advantage. Otherwise not.

Question 9

When do GPs offer co-investment opportunities

Answer 9

• deals are too large for the fund
• GPs want to gain favor with LP before raising a follow-on fund
• GPs are less experienced in established PE industry

Question 10

Is there adverse selection of co-investments?

Answer 10

No. The assets that GPs offer to LP for direct investing are not different from other investments in the same fund.

Question 11

Does previous relationship determine relative performance of co-investmetns?

Answer 11

No

Question 12

Is a large syndication size good for the performance of fund?

Answer 12

No. It has a negative effect.