Operationally Intensive Real Assets

Question 1

1. Name three factors that theory suggests should drive the extent to which natural resource price changes drive the performance of firms that process those natural resources.

Answer 1

• The price elasticity of the demand for the good
• The price elasticity of the supply for the good
• The extent to which an operating firm is exposed to or has hedged its expenses and revenues (i.e.,
its profits).

Question 2

2. To what extent have gold prices driven the equity values of gold mining firms based on data from the U.S. during the financial crisis in late 2008?

Answer 2

• In the short run, it appeared that the operationally-intensive firms related to gold production were driven more by the volatility of the equity markets than by the volatility of gold prices.

Question 3

3. Why are most listed MLPs in the U.S. involved in producing, processing and distributing energy products?

Answer 3

• MLPs receive tax treatment predicated on adhering to regulations, including that at least 90% of the entities’ revenues come from specified businesses, such as energy (in the U.S.)

Question 4

4. List two possible explanations for relatively high valuations of MLPs.

Answer 4

• A PVGO valuation theory (high anticipated growth)

* A Ponzi-like valuation theory (high, but potentially unsustainable distribution yields).

Question 5

5. Do infrastructure assets need to have all seven of the elements that identify investable infrastructure?
   Why or why not?

Answer 5

• No. There are no clear, hard lines separating infrastructure from other assets. Gray areas exist. Most infrastructure assets lack one or more of the seven elements, but they must contain many or most.

Question 6

6. What is the primary defining difference between greenfield projects and brownfield projects?

Answer 6

• A greenfield project is new, whereas a brownfield project is existing.

Question 7

7. What is the term used to describe when a governmental entity sells a public asset to a private operator?

Answer 7

• Privatization

Question 8

8. What are the common fees paid to managers of closed-end infrastructure funds?

Answer 8

• Management fees typically range from 1.0% to 2.0% annually, in addition to carried interest of 10% to 20% over a preferred return of 8% paid at the exit of the fund or liquidation of specific investments.

Question 9

9. Is investable intellectual property a public good or a private good?

Answer 9

• Private good because the cash generated can be privately received and owned.

Question 10

10. What are the four inputs to the simplified model of intellectual property values?

Answer 10

• p = the probability of generating large positive cash flows
• CF1 = Denote the first-year cash flows of the project
• g = perpetual growth rate
• r = discount rate

Question 11

brownfield project

Answer 11

that has a history of operations and may
have converted from a government asset into something
privately investable.

Question 12

double

Answer 12

taxation is the application of income taxes twice:
taxation of profits at the corporate income tax level and
taxation of distributions at the individual income tax level.

Question 13

downstream operations

Answer 13

focus on refining, distributing, and

marketing the oil and gas.

Question 14

evergreen funds

Answer 14

or unlisted open-end fund, allow
investors to subscribe to or redeem from these funds on a
regular basis.

Question 15

excludable good

Answer 15

is a good others can be prevented from

enjoying.

Question 16

gates

Answer 16

are fund restrictions on investor withdrawals.

Question 17

Greenfield project

Answer 17

Investable infrastructure can originate as a new, yet-to-beconstructed
project.

Question 18

intangible assets

Answer 18

are economic resources that do not have a

physical form.

Question 19

Intellectual property (IP)

Answer 19

is an intangible asset that can be

owned, such as copyrighted artwork.

Question 20

investable infrastructure

Answer 20

is typically differentiated from
other assets with seven primary characteristics: (1) public
use, (2) monopolistic power, (3) government related, (4)
essential, (5) cash generating, (6) conducive to privatization
of control, and (7) capital intensive with long-term
horizons.

Question 21

midstream operations

Answer 21

midstream MLPs—the largest of
the three segments—process, store, and transport energy and
tend to have little or no commodity price risk.

Question 22

negative costs

Answer 22

refer not to the sign of the values but to the fact
that these are costs required to produce what was, in the
predigital era, the film’s negative image.

Question 23

present value of growth opportunities (PVGO)

Answer 23

describes a high value assigned to an investment
based on the idea that the underlying assets offer exceptional
future income.

Question 24

public-private partnership (PPP)

Answer 24

occurs when a private
sector party is retained to design, build, operate, or maintain a
public building (e.g., a hospital), often for a lease payment for
a prespecified period of time.

Question 25

regulatory risk

Answer 25

is the economic dispersion to an investor

from uncertainty regarding governmental regulatory actions.

Question 26

unbundling

Answer 26

an increased interest in ____ IP from corporations and permitting it to be
purchased as a stand-alone investment.

Question 27

upstream operations

Answer 27

focus on exploration and production;
midstream operations focus on storing and transporting the oil
and gas.