Alternative Investment

CFA_LV2_AI_F.hwp

 

 

Alternative Investment

 

[ Private Real Estate Investments ]

 

○ Capitalization Rate

- cap rate = discount rate - growth rate

- value = V0 = NOI1 / cap rate

- NOI = 세전 금액

 

○ ERV (estimated rental value)

- term and revision approach : 계약 기간에 맞는 할인율

- layer method : 증분 현금 흐름에 맞는 할인율

○ Basic forms of real estate investment

	Debt	Equity
Private	Mortgage	Direct investments such as sole ownership, partnerships, and other forms of commingled funds
Public	Mortgage-backed securities	Shares of REITs and REOCs

 

○ Commercial property types

property types	demand factor	lease types
Office	job creation	gross lease (operating expense ⇒ owner) net lease (operating expense ⇒ tenant )
Industrial	retail sales growth	net lease
Retail	retail sales growth	percentage lease/rent (base fee + 매출연동 fee)
Multi-family	population growth
Storage	population growth
Health care	population growth
Hotel	job creation

 

○ Income approach

- direct capitalization method = NOI / cap rate

- discounted cash flow methos = CF / discount rate

- 오피스, 호텔

 

○ Cost approach

- MV of Land + replacement cost (profit 포함) - (physical deterioration

+ functional, locational, economic obsolescence)

- 신규 빌딩, sales comparison 적용 안되는 부동산, unusual

○ Appraisal-Based Indices

- NCREIF property Index (NPI), return = NOI + capital gain - capital expenditures

- 개별 부동산 가치의 합

- lower volatility and lower correlation

- tend to lag (분기 후행)

 

○ Transaction-Based Indices

- repeat-sales index : repeat sales of the same property. regression is developed to allocate the change in value to each quarter

- hedonic index : only one sale, regression is developed to control for differences in property characteristics

 

○ Financial ratios

- DSCR = first-year NOI / debt service ≈ DTI

- LTV = loan amount / appraisal value

- equity dividend rate = first year cash flow / equity

 

[ Public Traded Real Estate Securities ]

 

○ Types of publicly traded real estate securities

종류	특징
REITs	tax 효과, 배당 수익(이익보유 금지), particular kind of property
REOSc	capital gain, 성장성, 투자대상 다양
MBS	residential or commercial MBS
Mortgage REITs	invest in mortgages, mortgage securities or loans

 

○ Advantages and Disadvantages of publicly traded securities

Advantages	Disadvantages
▪ Superior liquidity ▪ Lower minimum investment ▪ Limited liability ▪ Access to premium properties ▪ Active professional management ▪ Protections accorded to publicly traded securities ▪ Greater potential for diversification	▪ Taxes versus direct ownership ▪ Lack of control ▪ Costs of a publicly traded corporate structure ▪ Price is determined by the stock market ▪ Structural conflicts of interest ▪ Limited potential for income growth ▪ Forced equity issuance.
( to REITs, not to REOCs ) ▪ Exemption from taxation ▪ Predictable earnings ▪ High yield	( to REITs, not to REOCs ) ▪ Lack of flexibility

○ NAVPS

- NOI / cap rate + other tangible asset - liability

- net asset value = total asset(MV) - liability

 

○ Funds from operations (FFO)

accounting net earnings	+ depreciation expense + deferred tax expense - gains from sales of property and debt restructuring + losses from sales of property and debt restructuring
	= Funds from operations

- FFO = Gross revenue - operating cost - G&A expenses - interest

- 경상적 현금영업이익

 

○ Adjusted funds from operations (AFFO) : 경

FFO	- non-cash (straight-line) rent adjustment - recurring maintenance-type capital expenditures - leasing commissions
	= AFFO

- 경상적 현금영업이익 - 경상적 지출

 

[ Private Equity Valuation ]

 

○ Economic terms of PEF

- carried interest : GP's share of the fund profits and is usually 20% of profits

- ratchet : specifies allocation of equity between stockholders and management of the portfolio company and allows management to increase their allocation, depending on company performance

 

○ Control Mechanism

- tag-along, drag-along clauses : anytime an acquirer acquires control of the company, the must extend the acquisition offer to all shareholders, including firm management.

- board representation : the private equity firm is ensured control through board representation if the portfolio company experiences a major event such as a takeover, restructuring, initial public offering, bankruptcy, or liquidation.

- priority in claims : private equity firms receive their distributions before other owners, often in the form of preferred dividends and sometimes specified as a multiple of their original investment. they also have priority on the company's assets if the portfolio company is liquidated.

 

- required approvals : changes of strategic importance must be approved by the private equity firm.

- earn-out : these are used predominantly in venture capital investments. Earn-outs tie the acquisition price paid by the private equity firm to the portfolio company's future performance over a specified time period.

 

○ Corporate governance terms of a private equity fund

- clawback : if a fund is profitable early in its life, the GP receives compensation from the GP's contractually defined share of profits. Under a clawback provision, if the fund subsequently underperforms, the GP is required to pay back a portion of the early profits to the LPs.

- distribution waterfall : this provision specifies the method in which profits will flow to the LPs and when the GP receives carried interest.

In a deal-by-deal method, carried interest can be distributed after each individual deal.

In the total return method, carried interest is calculated on the entire portfolio. (1) entire committed capital is returend to LPs; (2) value of the portfolio exceeds invested capital by some minimum amount

- No-fault divorce : this clause allows a GP to be fired if a supermajority of the LPs agree to do so.

- Removal for cause : this provision allows for the firing of the GP or the termination of a fund given sufficient cause.

- Investment restrictions : these specify leverage limits, a minium amount of diversification, etc.

- Co-investment : this provision allows the LPs to invest in other funds of the GP at low or no management fees.

 

○ Key differences between venture capital and buyout investments

	VC	Buyout
due diligence performed by private equity firms	private equity firms investigate technological and commercial prospects; investigation of financials is limited due to short history	private equity firms perform extensive due diligence
capital market presence	generally not active in capital markets	active in capital market
ability to grow through subsequent funding	companies are less scalable as subsequent funding is typically smaller	strong performers can increase subsequent funding amounts
source of general partner's variable revenue	carried interest is most common, transaction and monitoring fee are less common	carried interest, transaction fees, and monitoring fees

○ IRR

- gross IRR : cash flows between fund and portfolio companies

- net IRR : net of fee, cash flows between fund and LPs

 

○ Quantitative Measures

- PIC (paid-in capital) : 누적 capital call

- DPI (distributed to paid in capital) : 누적분배금 / PIC

- RVPI (residual value to paid-in capital) : NAV after / PIC

- TVPI (totla value to paid-in capital) : DPI + RVPI

 

○ NAV

- NAV before distributions = NAV after distribution in prior year + capital called down

- management fee + operating results

- NAV after distributions = NAV before distributions - carried interest - distributions

 

○ Venture capital method

- post-money value = PV(exit value)

- pre-money value = post-money value - investment

- fraction of VC ownership(f) = INV / POST or FV(INT) / exit value

- sharesVC = sharesFounders(f / 1-f)

- price = INV / sharesVC

 

[ A primer on Commodity Investing ]

 

○ Forward price

- F0 = S0e(r+U-Y)T

- U = cost of storage, Y = convenience yield

 

○ Backwardation vs. Contango

- backwardation : negative trend, seller 우위, roll yield +

- contango : positive slope, buyer 우위, roll yield -

 

○ Convenience yield

- monetary benefit from holding a physical commodity versus being long the equivalent futures contract

- Y = price after shock - first purchase price

 

 

 

 

 

 

 

○ Ways of participating in commodity markets

	advantage	disadvantage
buying the physical good	obvious and direct	the costs of storing and maintaining the asset
commodity stock	stock markets respond quickly and sensibly to events that may impact a firm's value	not the same as direct investment and often has low correlation with the price of the underlying commodity.
commodity mutual funds	diversification with low transactions costs	differences in management style, allocation strategy, and other characteristics among funds.
commodity futures	convenient, flexible, low transactions cost, and highly leveraged nature	spend time and effort to continuously close maturing contracts and open new positions

 

○ Return components of commodity futures investment

- total return = spot return + roll return + collateral return + rebalancing return

- excess return (index) = spot return + roll return = futures return

- collateral return : interest received on a cash investment

- rebalancing return : increased in value are sold, decreased in value are purchased

 

○ Models of expected return

- CAPM : not appropriate

- insurance perspective : producer → long commodity, short futures → backwardation

- hedging pressure hypothesis : depending on the balance of hedgers

→ contango or backwardation

- theory of storage : impact of inventory levels on commodity futures price

→ lower inventory levels → higher convenience yield