CFA Practice Question

There are 195 practice questions for this study session.

CFA Practice Question

Which one is an exit route for private equity investors?

A. MBO.
B. LBO.
C. Distressed securities.
Correct Answer: A

User Contributed Comments 8

User Comment
rhardin Is there a reason why another company couldn't perform an LBO of their own on a company that was previously bought out? So basically, an LBO on an LBO? This would make B correct as well.
CarsonBJ First, private equity companies are venture capital providors - not MBO's or LBO's. These are usually bank financed.
Second, venture capital (private equity) invest in new, high growth, high value potential companies. MBO & LBO target mature, stable growth, high asset companies.
As such, it is unlikely that a venture capital firm will continue to invest in a business throughout its long lifecycle until it is mature and then a target for a MBO or LBO.
rhardin Carson, that is not the case... there is a reason that the LBO information in the curriculum is included in the private equity section of the book. It is because private equity firms perform LBOs all the time. They do not just do venture capital. So I still disagree that another private equity firm could not perform an LBO on a company that had already been bought out before.
arudkov LBO-on-LBO - i think is very possible.4 seller (PE firm used LBO first) - an exit.
ericczhang I think the assumption is that if a firm has been bought out by a PE it already is highly levered and unable to carry more leverage. Thus it would be difficult for a LBO-on-LBO on the target firm's own balance sheets. It's possible, I suppose, but unlikely.

Also Private Equity and Venture Capital are not the same thing.
leftcoast Small companies that are bought by PE firms are quite often flipped to other PE firms.

If you have the resources to improve a company but you don't have the resources to take it public, then that is all you can do.
normaj2 I think ericczhang has it right: the goal of the PE firm is to create returns by increasing revenue, increasing efficiencies (including aligning managment with ownership) and taking advantage of leverage opportunities. exit strategies are built before the investment is made. So if the PE firm can see benefit to more leverage it would be built into the orignial and not a planned exit strategy for someone else to take advantage of.

but selling to managment may be preplanned exit. That doesn't mean that another PE firm won't see other opportunities and buy the investment or even use a LBO. But if the Original PE firm can see a benefit to more leverage then they will use it, so they will never plan on an LBO as an exit.
SWHY0104 Typically 25-40% of the PE exits are to other PEs. It's called a secondary exit in the LBO world (note secondary has multiple meanings, can be confusing). Rarely does management buyout the PE. Where would they get the money?
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