CFA Level II ExamCorporate IssuersEasy
A private equity firm is considering an investment in a distressed company. The firm plans to acquire senior debt at a discount, convert it into equity, and then implement a turnaround strategy. This strategy is most characteristic of which private equity investment style?
- AMezzanine Debt.
- BGrowth Equity.
- CDistressed Investing.
- DVenture Capital.
Show answer & explanationAnswer & explanation
Correct answer: C. Distressed Investing.
Distressed investing involves acquiring the debt or equity of companies facing financial difficulties, often with the intention of taking control, restructuring the company, and ultimately realizing a profit as the company recovers. Acquiring senior debt at a discount and converting it to equity is a classic distressed investing strategy.
Why the other options are wrong
- A. Mezzanine debt is a hybrid financing provided to established companies, typically not for acquiring debt at a discount in a distressed scenario with the intent to convert to equity for control.
- B. Growth Equity involves minority investments in established, growing companies, not turnarounds of distressed firms.
- D. Venture Capital focuses on early-stage, high-growth startups, not distressed mature companies.
Distressed Investing
Distressed investing involves acquiring the debt or equity of financially troubled companies with the goal of restructuring and turning them around for profit.
- Targets companies in or near bankruptcy.
- Often involves acquiring debt at a discount and converting to equity.
- Requires deep operational and restructuring expertise.
Memory trick: PE Power Plays: Start, Grow, Fix, Buy.