Alternative Investments Flashcards
How to calculate management fee
Management fee is paid annually on paid-in capital (PIC), which is just cumulative capital drawn down.
Carried interest
Carried interest is the profit distributed to the general partner. For example a fund may specify a total return method based on committed capital and is calculated as the excess of NAV before distributions above committed capital.
The three sources of value-added a private equity firm provides over public firms are
reengineering the portfolio firms, obtaining debt on favourable terms (cheap credit), and aligning the interests between private equity owners (the limited partners) and portfolio managers.
distribution waterfall.
The method of profit distribution between the LPs and GP is called distribution waterfall.
Market risk
Market risk describes the risk of how changes in interest rate, exchange rate and other macroeconomic factors affect private equity investments.
A clawback provision
A clawback provision in a private equity prospectus requires the general partner to repay part of previously distributed profits if the fund subsequently underperforms.
Insurance Theory
The hedging Pressure Hypothesis
The Theory of Storage
Under the Insurance Theory, the shape of the futures price curve can be explained by producers of a commodity (i.e. market participants that are long the physical good) selling the commodity for future delivery in order to hedge their exposure to price risk. The Hedging Pressure Hypothesis extends the insurance perspective to include consumers who hedge long positions, not solely producers with short positions. The Theory of Storage links convenience yields to inventory levels.
Rachet
Specifies the equity allocation between the limited partners and management
A tag-along, drag-along clause
would give management the right to sell an equity stake upon the sale by the private equity owners
VC Ownership
NPV Method and IRR Method
NPV:
INV/ [exist value / (1 + r)^n]
IRR:
FV(INV)/exit value
