Question

ANSWER BOTH QUESTIONS, DO NOT ANSWER IF YOU CAN'T ANSWER BOTH

1. Which of the following is FALSE about venture capital firms?

A. General partners describe VC managers who make investment decisions.

B. Limited partners describe VC investors who provide capital.

C. VC firms' fee structure are commonly described as 5/20

D. VC investment requires long-term commitment from limited partners as it takes a long time for a young firm to payoff.

2. Which of the following is NOT a notable puzzle in IPOs?

A. The short-term underpricing

B. The number of IPOs is highly cyclical.

C. The long-term underperformance.

D. Public investors usually cannot gett their hands on the newly issued IPO shares.

Answer 1

ANSWER: 1. C. VC firms' fee structure are commonly described as 5/20.

Reason: Generally in a VC company, the fee structure is of 2/20 - 2% is charged as the management fees for the fund whereas 20% is the profit share of their own investors(also called carry fee). This is somewhat similar to the equity invested in a startup company.

ANSWER: 2. A. The short-term underpricing

Reason: With the help of respective investment banks, companies tend to come up with a price which is under-priced- that is to say below what each share actually(intrinsic value) costs. This is to ensure that the IPO is not under-subscribed, else it will have a negative impact with respect to the company as a whole. Thus over-subscription of the IPO leads to short term under-pricing which is later on covered up and brought up to the level of its true value in an efficient market.