The Following Are Advantages of Private-Equity Partnerships

question 19

Multiple Choice

The following are advantages of private-equity partnerships:
I. carried interest gives the general partners potential for high profits.
II. carried interest, because it a call option, gives the general partners incentives to take risks as they are strongly motivated to earn back the limited partners' investment and deliver a profit.
III. There is no separation of ownership and control and general partners can intervene in the fund's portfolio companies any time performance lags or strategy needs change.
IV. There is no free cash flow problem as cash from first round must be distributed to investors.

• A) I, II and IV only
• B) I and II only
• C) I and IV only
• D) I, II, III and IV

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Definitions:

Long Position

The futures trader who commits to purchasing the underlying asset.

Short Position

An investment strategy where an investor sells borrowed securities with the expectation of buying them back at a lower price to make a profit.

Agricultural Futures

Contracts to buy or sell agricultural commodities, such as wheat, corn, or soybeans, at a predetermined price on a specified future date, used for hedging or speculative purposes.

Pork Bellies

Futures contracts that were historically traded on the commodity exchanges, representing 40,000 pounds of frozen, trimmed bellies of hogs, which are used to make bacon.