cff cfa l2 ss 13 Alternative Investments
Terms in this set (28)
Property Appraisal - Market Value Formula
Estimate R - Band of Investment
Weighted Mortgage Cost + Weighted Equity Cost
Estimate R - Build Up Method
Pure Rate + Liquidity Premium + Recapture Premium + Risk Premium
POST - Post Money
Characteristics of Private Equity - Buyout Funds
Steady CFs, Lrg asset base, strong mgmt, leverage, measurable risk, low work capial req'd, steady returns off multiple sales, auctions.
Characteristics of Private Equiy - Venture Captial Funds
Unknown CFs, new market/unproven, weak asset base, new mgmt, equity funded (no leverage), risk assessment difficult, large cash burn rate, high returns from limited successful investments.
Performance of PE fund - NAV after Distributions
Performance of PE fund - NAV before Distributions
TVPI - Total Value of Paid In Capital
DPI - Distributed Paid In Capital
PRE - Pre-Money
= what a company is worth today
PRE = POST - Initial Investment (INV)
= Accumulated Depreciation (remember to add recaptured taxes)
ERAT - Equity Reversion after taxes
= Net Selling Price - Mortgage Balance - Taxes
(Note: Taxes = Tax on Recaptured Depreciation + LT cap gains tax)
Market Extraction Method to Derive Capitalization Rate
Only need 2 inputs: Market Value and NOI; see "Market Value Formula"
Gross Income Multiplier
Sales Price / Gross Income = Gross Income Multiplier
Use it with a comparable property's gross income to estimate value.
Main ways Private Equity funds can create value
1. For late stage companies, PE can focus operations on most profitable areas.
2. Incentives for mgmt on exit (sale of company)
3. Optimizing financial structure of firm using debt if possible.
Difficulties in comparing public and private companies
1. Companies in different stages of development; more likely to make "approximate" comparisons
2. Diffferent capital structures cause need for adjustment.
3. Accounting #s need to be adjusted for relevant comparison.
In early years of PE fund, fees lower returns and investments valued at cost. Over time, investments yield higher returns.
Main performance measures of PE funds
2. Return Multiples (of the initial sum invested)
If investment not exited, value must be estimated and added.
Main Risks of Private Equity funds
Illiquidity, Unquoted Investments, Competition for attractive investments, mgmt of investee company, valuation of investments, lack of diversification
Valuation Steps in "Venture Capital Method"
1. Calculate POST
2. Calculate PRE
3. Determine Ownership Fraction (F = POST/INV)
4. Obtain # of Shares - Y = x [F/(1-F)]
5. Obtain the Price of Shares - INV/Y
Requires GP to return capital to LPs in excess of agreed profit split between GP and LP
Mechanism providing order of distributions to LPs first before the GP receives carried interest.
Tag Along, Drag along rights
contractual provisions in share purchase agreement that ensure any potential acquirer can't get control without making offer to all shareholders and mgmt.
No fault divorce
GP can be removed with 75+% approval of LPs
mechanism that determines allocation of equity between shareholders and the management team of private equity controlled company.
GPs share of profits generated by a private equity fund.
IRR that the private equity fund achieve before the GP receives any carried interest.