Cheat Sheet Alternative Investments Flashcards
Alternative investments characteristics
- Narrow manager specialization
- Low correlation with traditional assets
- Less regulation and lower transparency
- Limited and potentially biased historical risk and return data
- High fees
- High use of leverage
- Restrictions on redemptions
Categories of alternative investments
- Private capital, which includes private equity (leverage buyout, venture capital funds) and private debt (direct lending, mezzanine loans, venture debt, distressed debt).
- Real assets, which includes real estate, infrastructure, natural resources such as commodities, timberland and farmland etc.
** Hedge funds**
Soft hurdle rate
Performance/incentive fees are earned on the entire return if it exceeds hurdle rate.
Hard hurdle rate
Performance/incentive fees are earned on returns in excess of hurdle rate.
Investment clauses and provisions
Catch-up clause
Allows GP to receive all 100% of distributions in excess of the hurdle rate until the GP catches up with its cumulative performance fee.
Investment clauses and provisions
High water mark
This is the highest value, net of fees, used to calculate the performance fees.
Investment clauses and provisions
Clawback
Allows LPs to reclaim part of GPs performance fees if fund performance subsequently reversed.Waterfall
Investment clauses and provisions
Waterfall
The distribution method that defines the order of allocation to LPs and GPs.
Private Equity
Leveraged buyouts (LBOs)
Use borrowed funds to buy an established company. The company will be restructured to improve operations and eventually increase cashflow and profit.
2 types of LBOs:
* management buyouts (MBOs) where current management team buys and runs the company,
- management buy-ins (MBIs) where current management team is replaced and run by the acquirer.
Private Equity
Venture capital (VC)
Investments in less established companies with significant growth potential.
VC investing can take place at various stages:
**Formative stage: **angel investing, seed investing, early stage
**Later stage financing: **for expansion after commercial productions and sales but before IPO
Mezzanine financing: preparing for IPO.
Private Equity
Growth capital
Minority equity investments in established companies that require funds for growth/expansion, restructuring, acquisition etc.
Real estate
Appraisal index
Uses estimates rather than real transaction values, which understates volatility.
Real estate
Repeat sales index
Uses repeat sales of properties to construct the indices, but this suffers from sample selection bias since it’s unlikely the same property is available for sale annually.
Real estate
REIT index
This is based on prices of publicly traded REITs, which accuracy depends on how frequently the shares of the index trade.
Categories of infrastructure investments
**Economic infrastructure assets: **transportation (road, railways etc) and utility assets (water, gas, electricity distribution).
Social infrastructure assets: examples are healthcare and educational facilities.
Brownfield investments are investments in existing infrastructure assets.
Greenfield investments are investments in yet to be built infrastructure assets.
