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MindMap Gallery Alternative Investments CFA Level 2
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Alternative Investments CFA Level 2
Alternative investment CFA Level 2 mind map. This map introduces the knowledge of real estate investment, private equity valuation, and commodities. I hope this mind map will be helpful to you.
Edited at 2023-09-13 19:56:59
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Alternative Investments CFA Level 2
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- Outline
Alternative Investments
real estate investment
Overview
Investment method
direct investment
Invest in real estate itself
indirect investment
Invest in financial instruments whose underlying assets are real estate
debt
Mortgage-backed securities, etc., receiving interest
Equity
Hold shares in a real estate company or REITS or buy the real estate itself and earn capital appreciation and recurring income.
feature
heterogeneity
Every property is different
High unit price
proactive management
high transaction costs
depreciation
Generally need a loan
Low liquidity
Difficult to price
private real estate investment
feature
income
Double benefits: recurring income and capital appreciation
Dual attributes of stocks and bonds
Anti-inflation
Low correlation with other investments
Tax incentives
risk
business environment impact
Long development cycle
Unexpected inflation cannot be adjusted in time
Demographic factors
Surrounding environmental factors
Opaque information makes valuation difficult
Proactively manage costs
loan, leverage
Classification
Residential
Villasingle-family
Multi-family housing multi-family, apartments
Depends mainly on population growth
Affected by the tendency to rent
Affected by the ratio of house prices to rents
Affected by financing costs
non-residential
commercial real estate
Residential real estate designed to generate income
office building
Affected by job growth
Affected by the lease period in different regions
Affected by lease structure
net lease net lease
Tenants pay their own operating expenses
gross lease
Owner pays operating expenses
blend mode
The business pays the first year's operating expenses, and the tenant bears the excess of the first year's expenses thereafter.
upward-only rent reviews
With many tenants, management costs are high, and with few tenants, cash flow is unstable.
Industrial land
Affected by the comprehensive economic strength
net lease
warehousewarehouse
Affected by the comprehensive economic strength
Affected by import and export activities
retail propertiesretail properties
Influenced by consumer spending
economic health
employment growth
population growth
savings rate
lease terms
Affected by property quality
Anchor tenants are affected by the importance of the tenant, such as big brands, there are discounts
Percentage lease: additional rent paid above a certain sales revenue
The proportion is very small
The lease term for small and medium-sized tenants is 3-5 years, and the lease term for large tenants is longer.
hotelhospitality properties
farmland
woodlandtimberland
due diligence
Review lease contract
Confirm the fee
confirming inspections
Physical Inspection: Home Improvement
Environmental inspection: pollution, etc.
survey
Home improvements within foundation lines or easements
Review legal documents
Verify compliance
Valuation
value
Market value
investment value
Use value
mortgage value
highest and best use
highest implied value
Implicit value = post-construction value – construction cost (including developer’s profit)
Valuation method
income approach: discounted cash flow
Net operating income NOI net operating income
Definition: pre-tax deleveraging income after deducting operating expenses from real estate gross income
calculate
NOI=rental income at full occupancy (total rent of all spaces rented out) other income (other income, such as parking fees) - vacancy and collection loss (vacancy cost and collection loss) - operating expenses
Potential gross income: first two items of NOI, maximum income
Effective gross income: the first three items of NOI
gross revenue multiple method
Value = gross revenue × gross revenue multiplier
target real estate
Gross revenue multiplier = sales price/gross revenue
Comparable real estate
direct capitalization method
Assumption: NOI grows steadily every year and is sustainable
calculate
Based on the Gordon dividend growth model
capitalization rate
Also known as going-in cap rate
Under net lease, it is called all risk yield ARY, all risk yield
Deduct the present value of repair losses in the first year
discounted cash flow method
Valuation idea: Rent and discount rate are different in different periods, calculated in segments
cost approach cost approach: reconstruction
Scope of application
real estate special
Comparable transactions are difficult to obtain
basic concept
Replacement cost: The cost to rebuild a real estate using the latest technology and materials with the same utility
Reproduction cost: Rebuilding a property using original technology and materials at exactly the same cost
physical deterioration physical deterioration
repairable losscurable
Irreparable loss = (replacement cost developer profit - repairable loss) × (effective age of the building/total economic life)
obsolescence
functional obsolescence
Loss due to unreasonable design and failure to achieve intended use
positional obsolescence
Location no longer popular
Economically obsolete
No longer available under current economic conditions
Annual NOI reduction amount/capitalization rate
Valuation
Real estate value = land value construction cost developer profit-loss & obsolescence
sales comparison approach: similar transactions
Scope of application
Mostly used in villas
Valuation steps
Find the unit price of comparable real estate area
Adjust the price according to each attribute to achieve consistency with the valuation target
average
private real estate investment index
appraisal based
Disadvantages: Evaluation lag
reason
Not aware of market changes
Failure to capture market changes
Influence
Underestimating volatility
Underestimating the correlation
Thus overweight real estate positions
Transaction based index transaction based
type
repeat sales index repeat sales index
Repeat sales of the same real estate, return income
hedonic trading index
Regression of different characteristics of arbitrary real estate
Features
Leading assessment-based indices
There is noisy data
Private real estate debt investment
Solvency Index
Debt service coverage ratio, SDCR
SDCR=current NOI/current principal and interest
Preferably greater than 1.2
Loan to Value ratio, LTV
LTV = total loan amount/real estate valuation
The lower the better
profitability index
equity dividend rate equity dividend rate
Also known as cash-on-cash return
(NOI-interest)/own capital equity
internal rate of return IRR
Leveraged internal rate of return
Equity investor perspective
Cash flow during the period is the difference between net operating income and principal and interest. Cash flow at the end of the period = selling price - outstanding liabilities
deleveraging internal rate of return
All investor perspectives
The cash flow during the period is net operating income, and the cash flow at the end of the period is the selling price of real estate.
Publicly traded real estate securities
type
REITs
Unique advantages
tax deduction
Predictable income
High income payout ratio
High dividends
real estate corporations, RECOs
Unique advantages
Due to low revenue payout ratio and operational flexibility, More money to invest in new projects
Shared advantages
Strong liquidity
Low investment requirements
Limited Liability
Invest in high-quality, diverse real estate
No need to manage real estate yourself
Decentralized
Mortgage-backed securities, MBS
shortcoming
More tax than direct investment in real estate
lack of control
High subscription and redemption fees
Reliance on stock market performance
Conflicts of interest between institutional investors and individual investors
REITs have high income payout ratios, resulting in limited growth potential
Dilutive equity due to additional stock issuance
REITS
structure
Umbrella Trusts UPREITs
Establish an operating partnership with LP to indirectly hold and manage real estate as a GP
Umbrella Multiple Partnership Trusts DOWNREITs
On the basis of an umbrella trust, real estate can be held directly or indirectly.
type
Retail
Office
Residential
Industrial logistics
Logistics base
Medical health care
Hotel category
Warehousing storage
Lockers for individuals and SMEs
Influencing factors
GDP growth rate
All types of primary influencing factors
employment increase
The second largest influencing factor is offices and hotels.
retail growth rate
The second most influential factor in retail and industrial logistics
population growth rate
Housing, warehousing, and medical care are the second most influential factors
New space supply and demand
due diligence
Remaining term of the lease contract
Quick price changes for short contracts
inflation protection
Market rent analysis
Re-lease cost
Tenant concentration
new supply availability
Asset Liability and Leverage Analysis
management quality
Valuation
net present value method
Net present value per share NAVPS = (market value of assets - market value of liabilities) / number of outstanding shares
Valuation
Step 1: Valuing the real estate using the direct capitalization method
Step 2: Deduct non-cash rent and annualized adjustments
There is no such deduction for after-class questions
Step 3: Add the tangible asset values to obtain the total value
Step 4: Subtract the value of liabilities to obtain the net asset value
Step 5: Find NAVPS
Precautions
Different discount rates for private owners and REIT investors
The direct capitalization method using private real estate valuation is inconsistent with the public attributes of REITs.
NAV is a static metric
Capitalization rates are difficult to obtain when the market is not active
Relative value method - price multiplier
P/FFO valuation method
funds from operations, FFO
Operating cash flow FFO = accounting net income depreciation and amortization - income from selling assets
P/AFFO valuation method
adjusted funds from operations, adjusted operating cash flow, cash flow that can be used to distribute dividends
AFFO=FFO-non-cash rent-recurring maintenance capital expenditures
discounted cash flow method
private equity valuation
Value Creation
Rely on PE's expertise and resources for company restructuring and re-engineering
PE can help companies obtain low-cost debt financing
Sign terms to ensure that the interests of PE and management are aligned
Protecting PE: Management Control Mechanism
board seat
Founder’s Non-Competition Agreement
Claims for preferred dividends and priority liquidation rights
Reserved matters: The realization of important strategies requires the consent of the PE
Bet on earn-outs
private equity limited partnership
GP
Responsible for management, bear unlimited joint liability for debts, earn management fees and incentive fees
LP
Capital contribution, not responsible for operation, limited liability, earning net investment income
basic concept
Fund management fees
GP charges LP based on committed capital
transaction fee
carried interestcarried interest
Incentive fee or performance bonus
threshold rate of returnhurdle rate
LP’s minimum required rate of return, after which incentive fees will be paid
ratchet clause ratchet
The distribution mechanism of equity between shareholders and management. Management who achieves performance standards receive equity rewards.
Target fund size
vintage year
The year the fund started operating
Fund investment period term of the fund
Usually 10 years
corporate governance provisions
key man clausekey man clause
If the key person leaves or has no time for management, new investments cannot be made until the manager comes.
clawback provisionclawback provision
The excess incentive fee will be returned to LP
Performance Disclosure and Confidentiality
Forced buying and following rights tag-along, drag-alone rights
When a company is acquired, the acquirer must make a comprehensive offer to shareholders, including management.
no-fault divorceno-fault divorce
If the majority of LPs agree, the GP can be removed from office
removal for cause removal for cause
There must be a reason for dismissing a GPor and terminating the fund
Protect GP
investment restrictions
Profit distribution order
deal-by-deal waterfalls
Profit is distributed after each transaction is completed
total return waterfalls
Allocation based on performance within the portfolio
Exceeds committed capital or exceeds invested capital
co-investment
LPs can invest in funds managed by the same GP, but GPs cannot invest in investments under managed funds.
risk
Liquidity risk
Difficult to exit
No quote risk
Competitive environment risks
Few low-cost and high-quality projects
agent risk
capital risk
divestment
regulatory risk
tax risk
Valuation risk
financing risk
diversification risk
market risk
Focus on long-term risks
cost
transaction cost
Setup costs
administrative costs
Audit fees
Management fees and performance bonuses
equity dilution cost
agency fee
Fundraising service fee
Exit method
IPO
advantage
Highest exit value, high equity liquidity, enhanced attractiveness
shortcoming
The cost of listing is high, the waiting period is long, and the information disclosure after listing is strict.
secondary market sale secondary market sale
Sell equity to other investment institutions
management buyout management buyout
Management borrows money to acquire company
Liquidation write-off/liquidation
Valuation
Valuation of target companies
Venture Capital Model
Net present value method: working backwards from the perspective of investors
IRR method: working from front to back
Leveraged Buyouts Model Leveraged Buyouts Model
Exit value definition: exit value=invest cost earnings growth multiple expansion reduction in debt
Earnings growth: PE helps companies optimize operations and increase corporate profits.
Multiple expansion: The price multiplier expands, and the profitability of the company increases, thereby increasing the multiplier.
reduction in debt: reduce debt and pay off debt after making money
Calculation: The process of dividing the pie multiple times, deducting the value of debt, preferred stock, and common stock from the exit value
Valuing private equity funds
Internal Rate of Return
IRR since inception, IRR since inception
The IRR assumption that the fund is fully liquid is inconsistent with the facts
gross internal rate of return gross IRR: IRR without deducting various expenses, measuring the investment performance of PE funds
Net internal rate of return (IRR): after deducting various expenses, it reflects the income received by investors.
multiple
invested capital rate, paid in capital, PIC
Accumulated paid-in capital/committed capital
Funds actually available to the GP
Dividend rate on invested capital, distributed to paid in, DPI
Cumulative dividends received by LP/cumulative invested capital
Achieve cumulative income
realized gains
Residual value to paid in, RVPI
Net present value after dividends/accumulated paid-in capital
unrealized gains
Total value to paid in, TVPI
Total fund value/accumulated paid-in capital
TVPI=DPI RVPI
Realized gains Unrealized gains
Commodity
Classification
energyenergy
crude
technology, politics, economic cycle
natural gas
High storage and transportation costs
Petrochemical refined products
The shelf life is very short, a few days
weather effects
Environmental Policy Impact
grains
Affected by weather, pests and diseases, technology
livestock livestock
Post-slaughter frozen storage
Affected by grain prices, weather, diseases, and policies
industrial metalsindustrial metals
Affected by GDP, weather, season, policy, etc.
Iron, tin, lead, aluminum, nickel, etc.
precious metals
For coinage and jewelry blacksmithing
Softs/cash crops
Cotton, coffee beans, sugar crops, cocoa beans, etc.
Affected by economics; storability, policy, weather
life cycle
Generate→Transaction→Consumption
Natural gas has a short life cycle when used directly, while crude oil requires refining and has a long life cycle.
Industrial metals and precious metals can be stored, have flexible life cycles, rely on economies of scale and large upfront investment and have a time lag effect
Livestock, differentiation, storage enables long life cycle
Valuation characteristics
Real assets, tangible, with intrinsic economic value
Cash flow occurs when buying and selling
Valuation through discounting of possible future prices
Transportation and storage costs impact forward pricing
Commodity futures
participants
Hedging hedges
Investment & Trader
informed investors informed investors
speculation
Hedging
liquidity provider
arbitrageur
exchange
market analyst
Regulators
trade
spread
Basis = spot price - futures price
>0 backwardation
<0 contango
Calendar spread: the difference between the near-term contract and the forward contract
Delivery
cash settlement
physical settlement
income
earnings theory
insurance theory insurance theory
Seller-led, open short orders
Features: backwardation
Producers sell futures to transfer risk, counterparties bear risk, and backwardation occurs
Contango is not explained
hedging pressure theory
Thought: Hedging determines price
Futures prices are determined jointly by producers and consumers
Producers have large inventories and are willing to sell, and consumers are free to demand
No explanation for speculation
theory of storage
Idea: Supply and demand govern prices
Futures price = spot price direct warehousing cost - convenience rate of return
Limitations: Inexact
Revenue composition
Total return on commodity futures = price return, rollover return, mortgage return
Price income: income from changes in own price
roll return
Mortgage income
Margin income
rebalancing benefits
Index change, this item is 0 for a single commodity
commodity swap
type
excess return swap
total return swap
basis swap
variance swap
volatility swaps
commodity index
feature
breadth of coverage breadth of coverage
Weights
rolling method
rebalance
Supervision