# Alternative Investments Flashcards

Give the equation used to calculate total exit value.

Summarize the life-cycle types.

Contrast the valuation of commodities with the valuation of equities and bonds.

Identify the properties widely believed to be low-risk.

Offices, industrial and warehouse properties, retail properties, and multifamily (apartments).

Estimate net operating income.

Describe types of commodity swaps.

Calculate distributed-to-paid-in (DPI), residual-to-paid-in (RVPI), and total value to paid in (TVPI) of a private equity fund.

Describe diversified REITs.

Explain valuation in the context of an analysis of private equity fund returns.

Explain the layer method for estimating NOI and valuation.

Distinguish between the characteristics of buyout and venture capital investments.

Explain economic value determinants, investment characteristics, principal risks, and due diligence considerations for real investment trust (REIT) shares.

Calculate ownership fraction and price per share applying the venture capital method.

F = I/POST

y = x [F ÷ (1−F)]

P = I ÷ y

where

F = Investor’s required ownership

y = #shares investors require to achieve margin

x = #shares owned by founder

P = Price per share

Explain why backwardation is normal.

Explain due diligence in the context of an analysis of private equity fund returns.

Describe how the construction of commodity indexes affects index returns.

Estimate and interpret the discount rate to use for discounted cash flows (DCF) models.

Calculate the value of a property using DCF.

This method resembles DCF methods for equity valuation, which depends on the present value of projected cash flows (NOI) for some period and a terminal value (present value of cash flows to be received by the next purchaser).

Calculate premoney valuation, postmoney valuation, ownership fraction, and price per share applying the venture capital method in terms of IRR.

Calculate postmoney valuation, premoney valuation, ownership fraction, and price per share at each round of multiple financing rounds by applying the venture capital method.

Explain due diligence considerations.

Describe types of participants in commodity futures markets.

(Exchanges, analysts, and regulators)

Describe office REITs.

Contrast different types of speculators (i.e., informed investors, liquidity providers, and arbitrageurs).

Describe how commodity swaps are used to obtain or modify exposure to commodities.

A commodity swap involves exchanging payments over multiple underlying maturities based on specified reference commodity prices or indexes. Commodity swaps eliminate the need to manage multiple futures contracts while transferring risk. It is not standardized or exchange-traded.

Explain the difference between a commodity volatility swap and variance swap.

Explain private equity fund structures in the context of an analysis of private equity fund returns.

Describe the net income approach.

Describe types of participants in commodity futures markets.

(Hedgers and speculators)

Explain how private equity firms align their interests with those of the managers of portfolio companies.

Explain economic value determinants of private real estate.

Lease income resembles bond coupons and capital appreciation potential resembles that of stocks. Therefore, real estate has a risk-return profile between a portfolio of bonds and a portfolio of stocks. Individual real estate investment may have greater or less risk than individual stock/bond investment risk.

Describe characteristics of the grain sector.

Identify advantages and disadvantages of P/FFO and P/AFFO multiples.

Describe real estate investment trusts (REITs).

Describe characteristics of the industrial (base) metals sector.

Describe characteristics of the precious metals sector.

Explain investment characteristics for industrial and warehouse properties.

Give the considerations when using the NAV approach.

Name the types of real estate classifications.

Residential properties – Provides housing for individuals and families.

Commercial real estate properties – Purchased with the intent to earn income, including multifamily residential property. Generally classified by end use. Combinations of end use are called mixed-use.

Farmland and timberland – Used to produce agricultural products and wood products, respectively.

Explain the principal risks of REITs.

Estimate and interpret the capitalization rate (cap rate).

Calculate the value of a property using the direct capitalization method.

Contrast roll return in markets in contango and markets in backwardation.

Estimate and interpret gross income multiplier (GIM).

Calculate the value of a property using the GIM method.