Categories, Characteristics, and Compensation Structures
Categories
Private Capital
Private equity (PE)
Venture capital (VC)
Formative stage
Pre-seed capital (angel investing)
Early stage (start-up stage)
Later stage financing (expansion VC)
Management selling control of company to VC
Mezzanine stage financing
Leveraged buyouts (LBO)
Management buyouts (MBO)
current managment team involved
Management Buy-ins (MBI)
Replace existing management
Exit strategies
Trade sale
Sale to strategic buyer, i.e. competitor
Initial public offering (IPO)
Special purpose acquisition company (SPAC)
Recapitalization
issue debt to fund dividend
Private debt
Categories
Direct lending
provide capital directly to borrowers
Venture debt
start-up or early stage companies
Distressed debt
company with financial difficulty, expect restructure and revive
Collateralized loan obligations (CLO)
pool and devide into tranches
Unitranche debt
combine into a single loan with single interest rate
Real estate debt / infrastructure debt
Investment method
Fund investing (indirect)
Investors unable to affect underlying investments
Co-investing
Possesses rights (co-investment rights)
Direct investing
Great flexibility and control
Investment and compensation structure
Key partnership documents
Limited partnership agreements (LPAs)
Compensation structures
Hurdle rate
Hard hurdle rate
excess of the hurdle rate
Soft hurdle rate
entire annual gross return
Waterfall
Deal-by-deal (American) waterfalls
Whole-of-fund (European) waterfalls
Performance Calculation and Appraisal
Performance appraisal
PE and real estate performance evaluation
Multiple of invested capital (MOIC) / money multiple
Hedge fund performance evaluation
Illiquidity (mark to market problem)
Fees and returns
Custom fee arrangements
Either/or fee
1% management fee or 30% incentive fee above hurdle, whichever is greater
Private Capital, Real Estate, Infrastructure, Natural Resources, and Hedge Funds
Real Estate
Private fund investing
Infinite-life open-end funds
Core real estate strategies
Finite-life closed-end funds
Opportunitistic investing
Real estate investment trusts (REITs)
Infrastructure
Forms
Indirect investment
Master Limited Partnerships (MLPs)
Natural resources
Commodities
Characteristics
Investment return based on change in price
Trade commodity derivatives
Commodity futures pricing
Future price = spot price (1+r) + storage costs - convenience yield
Contango
futures prices higher than spot price, forward curve is upward sloping
Backwardation
futures prices lower than spot price, forward curve is downward sloping
Benefit
Hedge against inflation risk
Portfolio diversification
Timberland and farmland
Characteristics
Timerland
Return driver
Biological growth, change in spot prices and futures prices of cut wood
Farmland
Return driver: harvest quantities, commodity prices, land price changes
Risk
Fixed costs are relatively high
competition result in declines of prices
Hedge funds(100)
Characteristics
goad of redemption restrictions is to increase hedge fund manager flexibility
Equity hedge strategies
Market neutral
Long undervalued and short overvalued
Stable, low-return portfolios
Fundamental value
Fundamental analysis to identify undervalued
Long biased, value biased and small-cap biased
Event-driven strategies
Merger arbitrage
Long company being acquired and short acquiring company
Relative value strategies
Convertible bond arbitrage
purchase a convertible bond and short position in the underlying equity
Fixed income
General
sovereign debt and investment-grade corporate debt
High yield
higher-yielding securities
Volatility
short-volatility strategy invloves selling options
Multi-stragegy
efficiently and quickly as conditions change
Macro and CTA strategies
Macro strategies
long and short positions on overall market direction
Managed futures funds (Commodity trading advisers, CTA)
diversified directional in futures markets
