3.3 Other Real Assets Flashcards
Correlation between operating firms’ returns and price changes of their goods & services are driven by 3 factors:
1) price elasticity of demand for the good
2) price elasticity of the good
3) extend to which the operating firm has hedged or is exposed to changes in its profits
Why are operating companies’ stock investment is not a pure play?
Because stocks of operating companies tend to be more correlated with the overall equity markets
Shares of MLP are referred to as? And limited partners as?
Units
Limited partners = unit holders
3 major oil & gas sectors?
1) upstream - exploring and producing oil/gas
2) midstream - storing & transporting (little/no commodity price risk)
3) downstream - refining, distributing & marketing oil/gas
What are examples of the possible direct ownership risks of MLPs?
Development, extraction, etc
When MLPs were first established and what is their market cap today?
1981, 500 billion
How are: Corporations, Investment companies and Limited Partnerships taxed at:
1) corporate level
2) individual level
Corporation: 1) yes 2) yes
Invest companies: 1) no 2) yes
Limited partnership 1) no 2)no
What is cost basis?
The original price for which the asset was purchased for tax purposes.
Capital gains is the difference between cost basis (initial purchase) and sale price (later sale)
Return of capital is?
The return of PRINCIPAL invested WITHOUT the interest/return/income on that principal.
What is the limit on distributions for Mutual funds VS MLPs?
Mutual funds = income
MLPs = cash flow
3 potential drawbacks of MLPs?
1) complicated tax fillings (K-1 form)
2) Multiple state tax returns (MLPs have to pay taxes in every state which it operates in)
3) Unrelated business income tax (UBIT) - tax on income of a tax exempt entity that is not related to the tax exempt purposes of the entity
7 characteristics of INVESTABLE INFRASTRUCTURE
1) public use
2) monopolistic power
3) government controlled
4) essential
5) income producing
6) conducive to privatization of managerial control
7) capital intensive with long term horizons
Critical property of investable infrastructure is?
The nature of revenues. Investable infrastructure generates cashflows in monopolistic environment and depends on purchases or long term leases of facilities that generate stable cash flows
2 types of investable infrastructure projects, their definitions and reasons for using
1) greenfield project - not constructed yet, used to enable construction w/o using gov funds
2) brownfield - existing project already converted from a gov asset to a private asset, used to raise capital for a gov entity
2 infrastructure investment categories
1) economic - based on revenues (toll roads)
2) social - assets provide social service, do not generate revenue (schools, etc)
What is a concessionaire?
The holder of a concession (a right) to operate/build/manage, etc something given by the government
What does regulated pricing mean?
Changes to pricing of essential goods & services should be approved by public entities.
Regulatory risk
Risk of negative impact of government actions
What phases are included in the greenfield investment?
1) building & development
2) project construction
3) project ramp up period
3 types of infrastructure investment vehicles
1) listed securities
2) unlisted funds (open ended / close ended)
3) unlisted direct investment funds
Evergreen funds are? Key characteristics
Unlisted open ended funds.
Provide regular opportunities to invest more or withdraw funds.
To provide liquidity to investors, the fund needs to be able to quickly access capital otherwise it will have to install GATES.
Key characteristics of listed infrastructure stock
Have relatively high yields because of limited revenue growth potential and inelastic demand
Lower volatility because of monopolistic nature
Globally account for $3 trillion in assets. In 2014, S&P global infrastructure index comprised more than $1 trillion (40% utilities, 40% industrials, 20% energy)
Listed funds key chararteristics
Funds invest in exchange listed infrastructure stocks
May use 30-40% leverage
Unlisted close end funds key characteristics
Investors commit capital for 10-15 years
In 4-5 the capital is invested
1-2% management fees, 10-20% carried interest over 8% preferred return
Appraised values are used
60-90% leverage can be used
12 characteristics of infrastructure investment
1) inelastic demand
2) monopolistic market position
3) regulated entities
4) capital intensive set up + low operating cost (= high operating margins)
5) low volatility of operating cash flows
6) resilience to economic downturns
7) technology risk (something becoming obsolete or not proven to work yet)
8) long term horizons (50+ years)
9) inflation indexed cash flows
10) stable yield
11) low correlation with other asset classes
12) potentially low total & idiosyncratic risk
List 8 infrastructure investments from lowest to highest in terms of economic sensitivity
1) social infrastructure
2) pipelines
3) public railways
4) energy networks
5) brownfield highways
6) ports
7) airports
8) greenfield highways
Infrastructure investments have same risk-return characteristics with which investments?
Fixed income, institutional real estate & PE
What is the similarity of of infrastructure investments with institutional bonds?
Steady income, high current yields & inflationary hedging potential
What is the similarity of of infrastructure investments with institutional RE?
Generate cashflows
Social infrastructure has more in common with RE than economic infrastructure
What is the similarity of of infrastructure investments with PE?
Have control over underlying companies
Can add value through financial engineering
According to CFA, Investors consider infrastructure investment which part of their portfolio allocation?
34% - PE Allocation
16% part of real assets allocation
50% unique asset clas
What is an excludable good?
Good that is owned and that others can be prevented from using.
3 types of Intellectual property
1) film production & distribution (in general right skewed returns)
2) visual works of art
3) R&D + patents
What does it mean if returns are positively skewed
Investor can expect frequent small losses and a few large profits
2 types of IP
1) Newly created
2) Mature
What is a wasting asset?
Asset that has an immediate large payoff, however, the value of which is expected to decrease over time
6 characteristics IP
1) low operating risk (established IP)
2) low correlation with inflation
3) preserving value during macro instability
4) do not benefit from scarcity of inputs
5) essential part of economy
6) may be suitable to fund long term liabilities
What are negative costs in film production?
The costs associated with development of films (production, post production editing, advertising, etc)
4 types of equity film financing?
1) slate financing - a number of films are financed
2) corporate equity (private/public)
3) co-production (studios make a film together => share costs)
4) other third party equity
3 types of debt film financing?
1) senior secured debt - made by financial institutions, backed by collateral
2) gap financing - cover financing gap between production budget and senior secured debt
3) super gap financing/junior debt - next level that previous levels did not want to fund
3 types of senior secured debt for film financing
1) negative pick up deal - film distributor agrees to but film for a set price after taking delivery of completed film
2) foreign pre sales - distribution rights are sold and payment made after the film is complete
3) tax credits/grants
Auction house commission levels?
Around 15%
Median long term return and volatility on holding art
2.2% return & 17% volatility
5 patent investment types
1) patent acquisitions and licensing
2) patent enforcing and litigation
3) patent sale license back
4) patent lending
5) patent sales and pooling
Provisions in patent acquisition and licensing
1) minimum royalty - min amount should be reached
2) field of use - for region/market
3) reservation of rights - right to use patent
4) improvement - can improve patent
5) audit/reporting/payment due
6) exclusivity responsibilities
2 types of patent lending strategies
Securitization
Mezzanine IP lending
4 reasons why patents are bought
1) operational use
2) to use as trading cards
3) strategic use
4) monetary exploitation
Risks of patent investing
1) illiquidity
2) technology/operational risk
3) obsolescence
4) macroeconomic/sector risk
5) regulatory risk
6) legal risk
7) expiration risk
What is a newer and untraditional reason for patent buyers to enter the market?
Monetary exploitation
Example of unbundled IP?
Collection of artwork
The notion that investments in oil operating companies is not a pure play on return on oil is reflected in what correlation between oil firm ETF prices and US Equity prices?
Positive correlation
An investor notices that the return series for his infrastructure investment is smoothed. How does this affect diversification?
Compared to actual/unsmoothed returns, smoothed returns have lower volatility and lower correlation with other assets. The lower correlation results in overstated diversification potential for the investment.
What is intellectual property?
Excludable, intangible asset. May be bundled or unbundled.
3 stages of film production and what is included in each of the stages
1) pre-production (script development, set design, location scouting, casting, crew selection)
2) principal photography and film production (salary payment, wardrobe and set construction)
3) post production (film and music editing, special effects)
When is revenue risk applicable (and not) in infrastructure investment
In brownfield investments. For greenfield investments it is usually not a risk
Characteristics of real assets are below.
Which characteristics do Typical IP assets NOT share with real assets?
- Low operating risk
- Positive correlation with inflation
- Preserving value during instability
- Benefit from scarcity of inputs
- Essential part of economy’s infrastructure
- Long-term risk and return properties
- IP assets do not benefit from scarcity of inputs (in energy, manufacturing, and agriculture sectors).
