Alterative Assets are a major theme in the investing world, so CFAI expects candidates to have general knowledge about assets classes that are beyond the traditional categories of equity/stock and debt/fixed income. The Level 2 exam covers three alternative asset classes: real estate, private equity, and hedge funds. One item set (six questions) on alternative […]
Alternative Assets
Real Estate: Types of Properties
Offering potential diversification benefits to a stock and bond only portfolio, real estate is an important alternative asset class. Real estate presents investors with the opportunity to employ financial leverage, obtain tax benefits, and help hedge against inflation. Property Types (6) and Characteristics 1. Vacant Land Investors: Short term speculators, long term developers, investors seeking […]
Real Estate Valuation: NPV & IRR Analysis
NPV and IRR analysis can be applied to real estate valuation. The standard decision rules apply, in that an NPV greater than zero or an IRR above the required rate of return indicates that the real estate investment should be undertaken. IRR Challenges for Real Estate Valuation: IRR cannot properly value real estate investments where […]
Income Property Valuation Using Capitalization Rate
The income-based perspective is appropriate for valuing investment properties, rather than residential real estate. Real Estate Capitalization Rate is the required rate of return minus the growth rate; it can be used in conjunction with NOI to value income generating real estate. Capitalization Rate = R0 = r – g r = required return on […]
Gross Income Multiplier (GIM) for Real Estate Comps
The GIM can be used to compare properties or can be averaged across properties to determine a market GIM rate, which can then be applied to a property under investment consideration. GIM = Purchase Price / Gross Annual Income Because sale of income generating properties can be infrequent, it may be difficult to employ the […]
Private Equity: Venture Capital, Leveraged Buyouts and Exit Strategies
Private equity is a special asset class form of equity ownership, as these investments are not exchange traded. The exam should focus on two forms of private equity: venture capital (VC) and leveraged buyouts (LBO). Private equity typically requires investors to have a long investment time horizon; therefore institution investors, such as pension funds and […]
Private Equity Fund Structures
Typically, a private equity fund has a life of 10-12 years. Return on investment in a private equity fund commonly exhibits a “J-curve” shape, where returns are low in negative early in the life of the fund with high returns coming late in the life of the fund as companies owned by the fund are […]
Venture Capital and Leveraged Buyout Valuation
Venture Capital Method of Valuation with a Single Round of Financing The Venture Capital Method provides potential investors with a simple NPV or IRR view of a prospective VC fund investment. The following calculations are employed by the Venture Capital Method: Post Money Valuation (POST) = Estimated Terminal Fund Value / (1 + discount rate) […]
About Hedge Funds: What You Need to Know
Hedge funds are privately organized investment entities that commonly take both long and short positions in securities and derivatives contracts and employ the use of financial leverage. Hedge funds are usually organized as limited partnerships or limited liability companies and have strict minimum investment and net worth requirements. Equity Hedge Funds: Common strategies are market […]