Alternative Investments Flashcards
Give the equation used to calculate total exit value.
Summarize the life-cycle types.
Contrast the valuation of commodities with the valuation of equities and bonds.
Identify the properties widely believed to be low-risk.
Offices, industrial and warehouse properties, retail properties, and multifamily (apartments).
Estimate net operating income.
Describe types of commodity swaps.
Calculate distributed-to-paid-in (DPI), residual-to-paid-in (RVPI), and total value to paid in (TVPI) of a private equity fund.
Describe diversified REITs.
Explain valuation in the context of an analysis of private equity fund returns.
Explain the layer method for estimating NOI and valuation.
Distinguish between the characteristics of buyout and venture capital investments.
Explain economic value determinants, investment characteristics, principal risks, and due diligence considerations for real investment trust (REIT) shares.
Calculate ownership fraction and price per share applying the venture capital method.
F = I/POST
y = x [F ÷ (1−F)]
P = I ÷ y
where
F = Investor’s required ownership
y = #shares investors require to achieve margin
x = #shares owned by founder
P = Price per share
Explain why backwardation is normal.
Explain due diligence in the context of an analysis of private equity fund returns.
Describe how the construction of commodity indexes affects index returns.
Estimate and interpret the discount rate to use for discounted cash flows (DCF) models.
Calculate the value of a property using DCF.
This method resembles DCF methods for equity valuation, which depends on the present value of projected cash flows (NOI) for some period and a terminal value (present value of cash flows to be received by the next purchaser).
Calculate premoney valuation, postmoney valuation, ownership fraction, and price per share applying the venture capital method in terms of IRR.
Calculate postmoney valuation, premoney valuation, ownership fraction, and price per share at each round of multiple financing rounds by applying the venture capital method.
Explain due diligence considerations.
Describe types of participants in commodity futures markets.
(Exchanges, analysts, and regulators)
Describe office REITs.
Contrast different types of speculators (i.e., informed investors, liquidity providers, and arbitrageurs).
Describe how commodity swaps are used to obtain or modify exposure to commodities.
A commodity swap involves exchanging payments over multiple underlying maturities based on specified reference commodity prices or indexes. Commodity swaps eliminate the need to manage multiple futures contracts while transferring risk. It is not standardized or exchange-traded.
Explain the difference between a commodity volatility swap and variance swap.
Explain private equity fund structures in the context of an analysis of private equity fund returns.
Describe the net income approach.
Describe types of participants in commodity futures markets.
(Hedgers and speculators)
Explain how private equity firms align their interests with those of the managers of portfolio companies.
Explain economic value determinants of private real estate.
Lease income resembles bond coupons and capital appreciation potential resembles that of stocks. Therefore, real estate has a risk-return profile between a portfolio of bonds and a portfolio of stocks. Individual real estate investment may have greater or less risk than individual stock/bond investment risk.
Describe characteristics of the grain sector.
Identify advantages and disadvantages of P/FFO and P/AFFO multiples.
Describe real estate investment trusts (REITs).
Describe characteristics of the industrial (base) metals sector.
Describe characteristics of the precious metals sector.
Explain investment characteristics for industrial and warehouse properties.
Give the considerations when using the NAV approach.
Name the types of real estate classifications.
Residential properties – Provides housing for individuals and families.
Commercial real estate properties – Purchased with the intent to earn income, including multifamily residential property. Generally classified by end use. Combinations of end use are called mixed-use.
Farmland and timberland – Used to produce agricultural products and wood products, respectively.
Explain the principal risks of REITs.
Estimate and interpret the capitalization rate (cap rate).
Calculate the value of a property using the direct capitalization method.
Contrast roll return in markets in contango and markets in backwardation.
Estimate and interpret gross income multiplier (GIM).
Calculate the value of a property using the GIM method.
Describe the life cycle of agricultural and livestock sectors from production through trading or consumption.
Agriculture and livestock have well-defined production seasons specific to geographic regions, softs more than livestock. Storage is limited by storability. Long production time (planting through harvest).
Identify the bases on which real estate investments can be classified.
Describe storage REITs.
Justify the use of net asset value per share (NAVPS) in REIT valuation.
A REIT’s net asset value comprises the largest component of intrinsic value with the balance consisting of nonasset income streams (fee or management income), management value added, and the value of contingent liabilities.
Real estate may be valued under IFRS using either the cost model (like PP&E valuation) or fair-value methods, with changes in the latter directly affecting reported net income.
Compare the income, cost, and sales comparison approaches to valuing real estate properties.
Income – The risk-adjusted present value of cash flows (income and terminal value).
Cost approach – The cost to purchase land and establish improvements with like functionality and utility as the subject property.
Sales comparison – Derived from comparable-property market values adjusted for differences in size, age, location, property condition, and market condition.
Explain costs of private equity investments.
Explain initial public offerings (IPOs) as an exit route for private equity.
Explain stabilized NOI.
In some cases, a comparable or subject property may not have a current or next period income representative of its NOI potential (e.g., due to construction projects soon to be completed). Stabilized NOI projects a normal NOI1for use in estimating cap rates or NOI.
Describe the insurance theory of commodity futures returns.
Explain why AFFO is preferred over FFO.
Like FFO, AFFO measures earnings before deducting depreciation. Because real estate maintains value better than other assets in production, depreciation should not be considered.
However, AFFO recognizes capital expenditures necessary to maintain economic income from properties.
Explain hurdle rate and ratchet in the context of an analysis of private equity fund returns.
Describe valuation issues in buyout and venture capital transactions.
Compare the direct capitalization approach and the DCF methods.
Explain why the terminal cap rate may be different than that used for discounting estimated cash flows.
The terminal cap rate may exceed the going-in cap rate due to increased uncertainty about periods after the forecast period, higher inflation, or lower expected growth.
Explain a “key man” clause in the context of an analysis of private equity fund returns.
Describe characteristics of the Energy sector.
(Natural gas subsector)
Describe the life cycle of energy and metals sectors from production through trading or consumption.
Explain sources of value creation in private equity.
Describe characteristics of the energy sector.
(Crude oil subsector)
Highest economic necessity; most valuable of the commodities. Must be extracted, refined, and transported but stays in the ground for thousands of years. Light crude (WTI) preferred due to easier processing.
Economic activity drives demand while supply restrictions control price based on marginal benefit of production versus extraction costs. Risks include geopolitical conflict and environmentalism.
Explain risks of private equity investments.
Analyze the relationship between spot prices and futures prices in markets in contango and markets in backwardation.
Spot prices designate current delivery; futures prices reflect a commitment to deliver at a specific price and time.
Basis = spot price – futures price.
Backwardation describes positive basis (spot price higher than futures price).
Congtango describes negative basis (spot price lower than futures price).
Describe mortgage-backed securities (MBS)
Interpret net operating income.
Describe P/FFO, P/AFFO, and EV/EBITDA multiples for most REITs and REOCs.
Explain backwardation and contango when used to describe two futures contracts with shorter and longer maturity.
Explain carried interest and vintage year in the context of an analysis of private equity fund returns.
Describe finding postmoney valuation, premoney valuation, ownership fraction, and price per share at each round of multiple financing rounds by applying the venture capital method.
Discuss characteristics of mortgage lending value.
Explain management and transactions fees in the context of an analysis of private equity fund returns.
Management fees – The fund pays to the GP over the life of the fund based on a percentage of committed or, less commonly, invested capital or NAV.
Transactions fees – The fund pays to the GP for services provided in securing investments and may be split with the LPs by reducing management fees.
Describe the two fundamental concepts in venture capital (VC) transactions.
Describe shopping center/retail REITs.
Describe funds from operations (FFO) and adjusted funds from operations (AFFO).
FFO = Accounting net earnings + Real estate depreciation and amortization + Deferred tax charges + Losses (gains) from sales of property and debt restructuring.
AFFO = FFO − Noncash rent − Maintenance-type capital expenditures and leasing costs.
AFFO may also be known as funds or cash available for distribution.
Describe the characteristics of real estate
Describe characteristics of the livestock sector.
Describe investment characteristics for office buildings.
Explain investment characteristics for multifamily space.
Demand is influenced by demographic factors (population growth, young age segment for renters, and propensity to rent); cost of owning versus renting, which is in turn influenced by interest rates.
Explain a fully collateralized commodity futures contract.
Explain a clawback provision in the context of an analysis of private equity fund returns.
Calculate premoney valuation and postmoney valuation applying the venture capital method.
Explain investment characteristics for retail space.
Demand is influenced by consumers’ willingness to spend, which in turn is influenced by the strength of the overall economy, job growth, population growth, and savings rates.
Describe industrial REITs.
Calculate management fees and carried interest of a private equity fund.
Estimate and interpret the all-risks yield (ARY).
Calculate the value of a property using the ARY capitalization method.
Explain advantages and disadvantages of investing in real estate through publicly traded securities.
Explain liquidation as an exit route for private equity.
Demonstrate alternative methods to account for risk in venture capital.
Adjust the discount rate so that it reflects risk of failure and lack of diversification.
Adjust the terminal value, discount rate, investment, time to exit, or # shares using scenario analysis. (Note: Increasing # shares has no effect on exit values.)
Interpret and compare financial performance of private equity funds from the perspective of an investor.
IRR, the standard for private equity returns, is money-weighted where return measures used for public equity are time-weighted. Comparing private equity performance measures (e.g., IRR) may be misinterpreted when compared to public equity performance.
Estimate NAVPS based on forecasted cash net operating income.
Est.value of operating real estate
+ Cash and equivalents+Accounts receivable
+ Prepaid and other assets
+ Land held for future development
= Est.gross asset value
− Total debt
− Other liabilities
= Net asset value
Explain the role in a portfolio of private real estate investments.
Describe characteristics of the grain sector.
Explain the risks of private real estate.
Explain the storage theory of commodity futures returns.
Explain the advantage of investing in REOCs as opposed to REITs.
Calculate and interpret the components of total return for a fully collateralized commodity futures contract.
Describe the components of total return for a fully collateralized commodity futures contract.
Explain a secondary market sale as an exit route for private equity.
Explain the role in a portfolio, the major economic value determinants, investment characteristics, principal risks, and due diligence of private real estate debt investments.
Debt investments in real estate resemble other fixed-income investments. Debt investments in real estate receive their return on original investment from promised cash flows; underlying property value changes or discounting factor changes can affect the market value of the debt.
Define highest and best use.
Explain a management buyout (MBO) as an exit route for private equity.
Explain the hedging pressure hypothesis of commodity futures returns.
Explain why contango occurs.
Identify the subclassifications of commercial real estate.
Describe real estate operating company securities (REOCs).
REOCs rely primarily on capital gains from developed or improved properties rather than lease and rental income as do REITs. REOCs primarily dominate in countries that do not allow a tax advantage from income pass through.
