CFA Level 2 Mock Exam – Alternative Investments

PRACTICE SET 1 (18 mins)

Yushan Capital Partners Case Scenario
Yushan Capital Partners is a global private equity firm with offices in Taipei, Hong
Kong, and London. It has built a strong reputation with institutional investors, offering
venture capital, leveraged buyout, and special situation funds to pension funds,
endowments, and insurance companies. Pai-han Chen is a generalist analyst at Yushan.
Chen’s responsibilities include completing research projects assigned by the portfolio
teams and responding to questions from institutional consultants. Anant Madan works
as an alternative investment analyst for a consulting firm that is advising a large pension
plan that seeks to expand its private equity exposure. A member of that plan’s
investment committee asks Madan to evaluate Yushan’s current UK Fund IX offering
(Fund IX) for potential investment in the plan. As part of his analysis, Madan reviews
the offering document for Fund IX, as well as the results of a previously offered fund
with similar objectives, YCP UK Fund VI (Fund VI).
As part of his review of Fund IX, Madan has a discussion with Chen. Madan has noticed
from the offering document that Fund IX is subject to an annual reconciliation or “true-
up” to address the event of a highly profitable transaction followed by unprofitable
transactions. The GP pays back capital contributions, fees, and expenses subsequently
to the LPs to ensure the profit split is in line with the terms outlined in the prospectus.
He asks Chen to explain this concept in more detail.
Chen goes on to discuss a number of other fund provisions with Madan. He explains
that the no-fault divorce clause, tag-along rights, and hurdle rate all represent benefits
to the LP investors, whereas the co-investment provision and placement fees primarily
benefit the GP.
Madan reviews the most recent annual report for Fund VI (shown in Exhibit 1) to
evaluate Yushan’s prior track record. The £300 million fund has a vintage of 2011,
management fees of 2%, carried interest of 20%, a hurdle rate of 7%, and a term of
2018.
Exhibit 1 YCP UK VI—Operating Results (£ millions) as of 31 Dec. 2016

1
CFA Level 2 Mock Exam – Alternative Investments

Following his meeting with Madan, Chen is asked by a portfolio manager at Yushan to
do an initial review of Robologistix LTD, a potential investment opportunity. After
reviewing the company’s operating history, Chen notes the following characteristics
regarding Robologistix:
 limited operating history;
 significant product breakthrough in development, with outcome uncertain;
 difficult-to-forecast cash flows;
 weak asset base; and
 newly formed management team.
The portfolio manager asks Chen to determine the pre-money valuation for the potential
investment in Robologistix, using the following assumptions:
 Time to exit event = 6 years.
 Terminal value = £32 million.
 Amount of investment = £3.0 million.
 Discount return used by investors = 40%.
 Number of shares issued and outstanding to current shareholders = 500,000.
43. The language in the offering document that Madan asks Chen to explain most
likely describes:
A a clawback provision.
B carried interest.
C a ratchet clause.

44. Is Chen most likely accurate regarding provisions that benefit LPs versus those
that benefit GPs?
A Yes
B No, with regard to items that benefit the LPs
C No, with regard to items that benefit the GPs

45. The DPI value Madan calculates for Fund VI is closest to:
A 2.35×.
B 1.12×.
C 1.23×.

46. The carried interest Yushan received in 2016 is closest to:

A £53.0 million.
B £27.4 million.
C £12.5 million.

47. Which of the following valuation methods is Chen least likely to use for
Robologistix?
A Real option method

2
CFA Level 2 Mock Exam – Alternative Investments

B Discounted cash flow

C Replacement cost

48. Based on the assumptions Chen has for Robologistix, the estimated value per share
is closest to:
A £3.54.
B £4.29.
C £2.50

3
CFA Level 2 Mock Exam – Alternative Investments

PRACTICE SET 2 (18 mins)

4
CFA Level 2 Mock Exam – Alternative Investments