Alternative Investment Assets

Alternate Investments Investors need to diversify the type assets ,

investments, or securities they include in their portfolio to reduce risk and increase return.

Alternate assets other than Equity and Debt other assets which can diversify portfolio include :

Alternate Investments like Private Equity Real Estate Commodities Art & Antiques

Alternate Investments

Limitations on Alternate Investments Alternate Investments help to diversify

reduce risk and increase return but they have few limitations :

They are less regulated and less transparent than traditional investments . This is why they r popular with Institutional Investors than retail investors.

They are illiquid Difficult to value as there is limited data

available to asses . Ex : Difficult to value a Start Up .

Most valuation is based on assumptions , which might go wrong.

Private Equity

Venture Capital

•Invest in early stage companies .( on drawing board)•It is considered the highest Risk area in PE•Gestation period is high but if succeeds return is in multiples.

Growth Equity

•Invest in existing companies with customer base , revenues , earnings.•These are companies which want to expand and their cash flows are not enough .•Will help in planning for IPO•Help the existing share holders to exit

Buyouts •Investments in established companies , restructure and change the owner ship .•It can also be making a public company in to private company.•LBO- Leveraged Buy outs ( Lot of debt raised to but out )

Distressed Investing

•Buying out companies on verge of default •Specialize in purchasing default companies .•Purchase at discount to par value and if turn around happens return would be higher .

Private Equity Strategies – Life cycle of companies

PE The success rate of VC industry is 7-8% gives

10X return while 15% gives 3X return and 20% gives break even and rest more than 50% of companies dies or in loss.

PE Structuring PE are organized as partnerships that have a life cycle

involving fund raising (3-4 yrs) , deployment & investing (5-7 yrs) and return of capital to investors after assets r sold.

PE is usually Limited partnership or LLP’s. PE firm that sets up partnership , raises funds and finds suitable investments is called General partner .

ex : Blackstone , Carlyle , CVC, AXA , ICICI PE etc.Investors who contribute capital to the partnership are

called Limited partners.PE can have different funds for different types of

Investments and each fund may be managed by different Fund Managers.

Note : check PDF example

Real Estate Real Estate refers to land and buildings Many Investors focus their RE investments in

Commercial real estate ( income-generating)As of 2011 , there was $26.6 trillion

commercial RE around globe – 40% of World GDP.

Commercial RE represents major portion of global investable universe.

Real Estate Major segments in Real EstateLand : No Cash flow streams , Out flow in terms of taxes Once approvals and permits are obtained and developed it

will have value.Offices : Largest Segment of commercial Real estate .

Engaged on short term or long term lease. Rents increase as per inflation so it protects cash flows against inflation .

Multi Family Residential Dwellings or ApartmentsRetail : shopping malls , leases to long term to Key anchor

tenants and short term to others. Industrial : Manufacturing facilities ,Warehouse etcHotels etc

Real Investments – Investment Vehicles Investors can gain an equity exposure to real estate by purchasing directly or

either the private or public market . In Private markets primary entities are real estate limited partnerships and

real estate equity funds. Real estate limited partnerships operate like PE , where general partner is very

often Real estate development firm. Real Estate Equity Funds hold investments in hundreds of commercial

properties . They are often open ended funds and they issue and redeem shares..

REITS ( Real Estate investment trusts) ,are investments through public markets - A Real Estate Investment Trust (REIT) is a trust that offers units to the public. Generally speaking, REITs are vehicles which raise funds from investors, acquire rent yielding real estate and distribute the income to investors. REITs typically own & manage income producing properties and are required to distribute most (90%) of the profits earned as dividend to unit-holders.

REITS are going to listed and traded in exchanges .http://in.reuters.com/article/2014/06/26/india-reits-blackstone-

idINKBN0F110U20140626

REIT - Example Ascendas Real Estate Investment Trust ("A-REIT") is Singapore's first and largest listed

business space and industrial real estate investment trust with a diversified portfolio of 103 properties in Singapore and 2 business park properties in China as at 31 March 2014.

A-REIT'S PORTFOLIO COMPRISES : The China portfolio comprises two business park properties, one of which is located in Beijing

and the other in Shanghai. A-REIT's focus in China is to target higher value-added industries such as IT and software companies as well as corporate headquarters of multi-national companies and large local corporations within tier-one cities such as Beijing and Shanghai.

A-REIT hosts a customer base of around 1,300 international and local companies from a wide range of industries and activities, including research and development, life sciences, information technology, engineering, light manufacturing, logistics service providers, electronics, telecommunications, manufacturing services and back-room support office in service industries, etc. Since its initial public offering in November 2002, A-REIT has been paying out 100% of its income available for distribution.

Ascendas Funds Management (S) Limited ("AFM") is the manager of A-REIT (the "Manager"). The Manager is committed to delivering predictable distributions and long-term capital stability to Unitholders through a three-pronged strategy of:

Value-adding investments comprising development as well as acquisition of income-producing properties with strong underlying real estate fundamentals;

Organic portfolio growth through proactive portfolio and asset management, including asset enhancements and divestment; and

Prudent capital and risk management.

CommoditiesCommodities are physical products such as

corn , wheat , copper , gold or oil . They tend to rise with inflation and provide natural protect against inflation.Invest in Commodity

Purchase physical stock , should have holding space and utilization need or

Invest in equity of companies which are

in production of commodities .

But this will not direct exposure to

commodity and will not get full

diversification.

Use Commodity Derivatives . If

investor is bullish on Crude he can

purchase crude Future at $ 106 today and if it increases can sell future and settle

it in cash .

Invest in Structured

products that attempt to replicate

exposure to commodity .