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2020 CFA LEVEL II > Alternative Investment > Flashcards

Alternative Investment Flashcards

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CFA flashcards
1
Q

Debt

A

private - mortgage

public - mbs

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2
Q

Equity

A

private - direct investments such as sole ownership, partnerships, and commingled funds

public - shares or REITs and REOCs

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3
Q

reasons to invest in real estate

A

generate current income and capital appreciation
as inflation hedge
for diversification
tax benefits

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4
Q

cost approach (real estate valuation)

A 
replacement cost
- curable physical deterioration
= replacement cost after curable physical deterioration
- incurable physical deterioration 
(effective/economic life & replacement cost)
- incurable functional obsolescence 
(change lower compare to new)/cap rate
- location obsolescence
- economic obsolescence
\+ market value of land 
= est value by cost approach
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5
Q

income approach - direct capitalization method

A

cap rate = discount - growth rate
=NOI/Comparable sales price

value = NIOI / cap rate (going-in)

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6
Q

gross income multiplier - direct capitalization method

A

sales price/gross income

value = gross income * gross income multiplier

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7
Q

income approach -DCF

A

using terminal cap rate

appropriate for REIT & REOC

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8
Q

NIO

A

rental income + other income
- vacancy & collection loss
= effective gross income
- operating expense (not including int. exp and income tax)

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9
Q

layer method

A

term rent/ term rent cap rate

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10
Q

appraisal-based indices

A

NCREIF property index (NPI)
RETURN = (NIO - cap.exp + change in market value)
/ beg. market value

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11
Q

Transaction based indices

A 
using repeat-sales index
a hedonic ( required only one sale) index
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12
Q

Debt service coverage (DSCR)

A

first year nio/ debt service

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13
Q

loan to value

A

loan amount / appraisal value

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14
Q

max loan

A

min (implied by LTV, DSCR)

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15
Q

cash-on-cash return / equity dividend rate

A

1st year cash flow (noi-debt pmt) / equity

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16
Q

NAPVs

A

(asset - liabilities) / shares

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17
Q

NOI

A

before deduction of depr &g&a

=EBITDA + G&A

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18
Q

FFO

A

Accounting net earnings, excluding

1) depr on real estate
2) deferred tax charges
3) gains or losses from sales of property and debt restructuring

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19
Q

NAVPS of real estate using FFO

A 
NOI - non-cash rent
\+full year adj. for acquisition
\+ growth NOI * (1+g)^n
/ cap rate
\+cash & equivalent
\+land held for future development
\+a/r
\+prepaid assets
-debt 
-liability

=net asset value / shares outstanding

FFO/shares outstanding * price/ffo multiple

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20
Q

FFO

A

most used, adjusts reported earnings and is popular measure of continued operating income of a REIT or REOC

account net earnings
+ depr
-gains from sales of property
+ loss from sales of property

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21
Q

AFFO

A

most useful /better than FFO in representation of current economic income
cash available for distribution
relies on est
=FFO
- non-cash rent adj
-re-occurring maintenance type capital expenditure
=AFFO

AFFO/SHARES * PRICE/AFFO MULTIPLE

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22
Q

P/E firm add value from

A
  1. ability to re-engineer the portfolio company and operate it more efficiently
  2. ability to obtain DEBT financing on more advantages terms
  3. superior alignment of interest b/w mgmt and private equity ownership
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23
Q

P/E firms align interest with portfolio managers by

A
  • compensation
  • tag-along-drag-along clause
  • board representation
  • non-compete clause
  • priority in claims (dividends and liquidation)
  • required approvals
  • earns-outs (venture capital): mechanism linking the acquisition price paid by the p/e firm to the company’s future financial performance over a predetermined time horizon
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24
Q

real option analysis

A

applicable for immature companies with flexibility in their futures strategies

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25
Q

Exist value

A

investment cost
+ earnings growth
+ increase in price multiple
+ reduction in debt

26
Q

post-money valutaion

A

PRE + INV

27
Q

ownership proportion of VC

A

INV/POST

28
Q

NPV method

A 
f = INV/POST
POST = EXIST/(1+R)^n
29
Q

IRR Method

A

f= fv(inv)/exist value
shares vc = share founders (f)/(1-f)
price=INV/shares vc

shares vc2 = (shares vc1 + shares founder) f2/(1-f2)

30
Q

r*

A

(1+r) / (1-q) -1

31
Q

limited partnership

A

provide funding, no active role in mgmt

32
Q

general partner

A

limited partnership is liable for all firms debts and has unlimited liability, portfolio managers

33
Q

ratchet

A

allocation of equity b/w stockholders and mgmt of the portfolio company
mgmt to increase their allocation depending on company performance

34
Q

PIC

A

PIC / committed capital

35
Q

DPI

A

REALIZED return
=cumulative distribution / PIC

DPI = £345 (Total distributions)/£280 (Total call downs) = 1.23×.

36
Q

RVPI

A

unrealized return and is the value of the LP’s holding in the fund dividend by the cumulative invested capital

= NAV after distribution / PIC

37
Q

TVPI

A

RVPI +DPI, net of mgmt & carried int

38
Q

mgmt fee

A

PIC * %fee

39
Q

carried int

A

%(nav before distribution/gross NAV - committed capital)

40
Q

NAV before distribution

A

NAV after distribution
+capital called-down
-mgmt
+operating result

41
Q

NAV after distribuion

A

NAV before distribution

  • carried interest
  • distribution
42
Q

contago

A

futures prices > near term futures prices

43
Q

backwardation

A

s > near futures price

positive calendar spread, basis spread

44
Q

insurance theory (backwardation is normal)

A

the desire of commodity producers to reduce their price risk drives commodity futures returns
future prices will be LESS than current spot prices to provide a return to those buying futures from producers

45
Q

basis

A

spot - future yld

46
Q

calendar spread

A

future - near

47
Q

Hedging pressure hypothesis (long + short)

A

when producers hedging behavior dominate, the mkt will be in backwardation
when user dominates, market will be in contango

48
Q

theory of storage

A

futures price = spot + storage cost - conveniencet yld

49
Q

total return (futures)

A

collateral return T-Bill
+ price return
+ roll return (price of expiring/price of new)-1

50
Q

advantages of publicly traded real estate securities

A

superior liquidity
lower minimum investment active professional mgmt
protections afforded to public traded securities
greater diversification potential

51
Q

disadvantages of publicly traded real estate securities

A

lower tax efficiency compared to direct ownership
lack of control
costs of a publicly traded corp. structure
volatility associated with market pricing
limited potential for income growth
forces equity issuance
structural conflicts of interest

52
Q

Due Diligence consideration

A 
remaning lease terms
inflation protection
in-place rents vs. market rents
costs to re-lease space
tenant concentration in the portfolio
tenant's financial health
new competition
b/s analysis
quality of mgmt
53
Q

shopping/retail value determinant

A
  1. retail sales growth

2. job creation

54
Q

office/hotel

A
  1. job creation

2. supply vs. demand

55
Q

residential

A
  1. population growth

2. job creation

56
Q

health care

A
  1. population growth

2. supply & demand

57
Q

industrial

A
  1. retail sales growth

2. population growth

58
Q

storage

A
  1. population growth

2. job creation

59
Q

clawback provision

A

requires the GP to return capital to LPs in excess of the agreed profit split between the LPs and GPs. This provision ensures that when a private equity firm exits a highly profitable investment early in the life of the fund but subsequent exits are less profitable, the GP pays back capital contributions, fees, and expenses to LPs to ensure that the profit split is in line with the terms outlined in the fund’s prospectus.

60
Q

Carried interest

A

represents the GP’s share of profits generated by the fund.

61
Q

co-investment provision

A

favorable for LP investors. With this provision, LPs generally have a first right of co-investing along with the GP. This can be advantageous for the LPs because fees and profit share are likely to be lower (or zero) on co-invested capital.

2020 CFA LEVEL II (15 decks)

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