Alternative Investment

Question 1

Cost approach valuation

Answer 1

To use when:
o (1) when the subject property is relatively new,
o (2) for unusual properties, or
o (3) for properties where comparable transactions are limited.

Value of land + replacement cost – adjustment for est. dep.

Question 2

Management fees (%)

Answer 2

Management fees/Gross income

Question 3

Cap rate

Answer 3

Discount rate – Growth rate
NOI1/(comparable sales price)
Dove comparable sales price = value

Question 4

Discount rate (for DCF)

Answer 4

Cap rate + growth rate

Question 5

Value (V0) (direct capitalization method)

Answer 5

NOI1/(cap rate)=NOI1/(r-g)

Question 6

Gross income multiplier

Answer 6

Sales price / gross income
Dove Sales price = value

da comparable transactions

Question 7

Value of loan

Answer 7

Lower between LTV and DSCR calculations
1) Loan amount = (NOI1/DSCR) / interest rate
Dove Debt = NOI1 / DSCR

Oppure
2) Loan amount = LTV * Appraised value

Question 8

Equity dividend rate

Answer 8

CF1/Equity

Question 9

NAV

Answer 9

Assets - Liabilities

Question 10

Paid in capital

Answer 10

X% * Capital drawn down

dove capital drawn down = committed capital

Question 11

Carried interest

Answer 11

X%* (NAV – Committed capital)

Question 12

DPI–> realized return (what LP receives)

Answer 12

Distribution expense / Invested capital

Question 13

RVPI –> unrealized return

Answer 13

NAV(after distribution) / Invested capital

Question 14

TVPI

Answer 14

DPI + RVPI

Question 15

ROI

Answer 15

EXIT/POST

Question 16

PRE

Answer 16

POST-Investment

Question 17

Fractional ownership

Answer 17

Investment / POST

Question 18

N. of shares allocated to VC investors

Answer 18

Shares allocated to founders *(f/(1-f)

Question 19

Dilution (for the first round of investors) after second round

Answer 19

F1*(1-F2)

Question 20

Price per share for VC investor

Answer 20

PRE/# of shares

Question 21

Income approach to valuation

Answer 21

For appraisals
due metodi:
- direct cap method
- DCF method

Question 22

NOI

Answer 22

• before financing cost and income taxes
• after vacany, collection losses, opex

Question 23

Value of a property based on all risks yield (ARY)

Answer 23

Rent1/ARY

Question 24

REIT

Answer 24

: real estate investment trusts = debt investments
 exemption from corporate taxation
 predictable earnings
 higher yield –> div yield higher than publicly traded equities
 they can do secondary equity offerings se un anno sono andati in negative e non hanno abbastanza cash per finanziarsi

Valuation –> NAVPS using current market values

Question 25

o REOCs:

Answer 25

equity securities NO tax advantages

Question 26

o MBS

Answer 26

residential or commercial mortgage-backed securities

Question 27

• Advantages of investing in publicly traded real estate securities

Answer 27

superior liquidity,
o transparency,
o lower minimum investment,
o access to premium properties,
o active professional management,
o protections afforded to publicly traded securities, and
o greater diversification potential.

Question 28

• Disadvantages of investing in publicly traded real estate securities

Answer 28

o lower tax efficiency
o lack of control
o costs of a publicly traded corporate structure
o volatility associated with market pricing
o limited potential for income growth
o forced equity issuance
o and structural conflicts of interests.

Question 29

• Tag-along, drag-along clauses

Answer 29

Any time an acquirer acquires control of the company, they must extend the acquisition offer to all shareholders, including firm management;
o Not a good control mechanism for private equities

Question 30

GP

Answer 30

party in a PE with unlimited liability for the firm’s debts
- carried interest is his profit from fung

Question 31

Distribution waterfall

Answer 31

method of profit distribution between LP and GP

Question 32

Venture capital

Answer 32

• funded with equity
• High returns from a limited number of highly successful investment and a significant number of write offs of low performing investments or failure
• Monitor achievement of milestones defined in business plan and growth management
• Expanding capital requirement in growth phase
• Assess risk is difficult because of new technologies, new markets and lack of operating history
• NO debt, NO cash flow, NO DCF, NO true comparable firms
• Drivers of equity returns: Pre-money valuation, investment, and subsequent dilution
• use ROI

Question 33

PE

Answer 33

• funded with debt
• Low variance across returns form underlying investments. Bankruptcies are rare
• Monitors Cash flow management and strategic and business planning
• Low WC requirement
• Risk is measurable (mature businesses, long operating hstory)
• DCF ok, comparables ok
• Drivers of equity returns: Earnings growth, increase in multiple upon exit, and reduction in the debt

Question 34

PE - exit routes

Answer 34

IPO, MBO, secondary market sales, liquidation

Question 35

PE - committed capital

Answer 35

amount of funds investors committed to over the life of the private equity fund
o Funds from committed capital are drawn down over time as the firm needs more capital

Question 36

J curve

Answer 36

pattern in private equity investment return, not risk. The return on investments usually declines initially, then increases as exit nears

Question 37

Hurdle rate

Answer 37

carried interest will only be paid if the long-term returns of the fund exceed it–> but then it is paid on ALL THE DIFFERENCE NOT ONLY ON THE EXCEEDED PART

Question 38

Clawback provision

Answer 38

investors can claim back carried interest if suboptimal performance of the fund over its life

Question 39

Contango

Answer 39

futures prices > spot prices,

Question 40

Backwardation

Answer 40

futures < spot

Insuance theory implies that backwardation is a normal condition

Question 41

Roll return

Answer 41

> 0 in backwardation
results from closing out expiring contracts and reestablishing the position in longer-dated contracts