CFA Alternative Investments Syllabus

Define private equity.

Investment in the equity of companies that are not publicly traded, either by taking private companies through buyouts or funding private firms, aiming to add value and exit at a profit.

What are the two dominant private equity strategies?

Leveraged buyouts (LBOs) and venture capital.

What is a leveraged buyout (LBO)?

The acquisition of a company financed largely with debt, where the target's assets and cash flows service the debt; the sponsor seeks to improve operations and exit at a higher valuation.

Distinguish an MBO from an MBI.

In a management buyout (MBO) the existing management team acquires the company; in a management buy-in (MBI) an external management team buys and takes over the company.

List the stages of venture capital financing.

Formative stage (angel/seed and early stage/startup), later/expansion stage, and mezzanine-stage (pre-IPO) financing.

What are the common exit routes for private equity investments?

Trade sale (sale to a strategic buyer), IPO (public listing), secondary sale (to another financial sponsor), recapitalization, and write-off/liquidation.

How is a typical private equity fund structured and what is its life?

As a limited partnership with a general partner (GP) managing and limited partners (LPs) providing capital; typical life is about 10-12 years including a commitment/investment period followed by harvesting.

What is committed capital versus a capital call (drawdown) in PE?

Committed capital is the total amount an LP pledges; a capital call (drawdown) is the GP's request for portions of that commitment as investments are made over time.

What is carried interest and a clawback provision in PE?

Carried interest is the GP's share of fund profits (often 20%). A clawback requires the GP to return excess carried interest if later losses mean the GP was overpaid relative to the agreed profit split.

Distinguish a deal-by-deal (American) waterfall from a whole-fund (European) waterfall.

In a deal-by-deal (American) waterfall carried interest is paid as each deal is exited, favoring the GP; in a whole-fund (European) waterfall the GP receives carry only after LPs recoup all contributed capital plus the hurdle, favoring LPs.

What is the J-curve effect in private equity?

Early in a fund's life returns are negative due to fees, expenses, and write-downs before value-creating exits occur, producing a J-shaped cumulative return path over time.

Name the two primary methods used to value a private equity portfolio company.

Market/comparables approach (applying multiples such as EV/EBITDA from comparable public firms or transactions) and the discounted cash flow (income) approach.

Write the enterprise value multiple used to value a private company via EBITDA.

$EV = \left(\dfrac{EV}{EBITDA}\right)_{comparable} \times EBITDA_{target}$, then equity value $= EV - \text{net debt}$.

How do PE fund IRR (money-weighted) and its interpretation of performance differ from a time-weighted return?

PE performance is measured with IRR, a money-weighted return that reflects the timing and size of GP-controlled cash flows (calls and distributions), unlike time-weighted returns used for liquid portfolios.

Define the PE multiples PIC, DPI, RVPI, and TVPI.

PIC = paid-in capital / committed capital (how much is drawn). DPI (realized) = cumulative distributions / paid-in capital. RVPI (unrealized) = residual NAV / paid-in capital. TVPI (total value) = DPI + RVPI = (distributions + NAV)/paid-in capital.

What are the four main forms of real estate investment along the debt/equity, public/private grid?

Private equity (direct ownership), private debt (mortgages), public equity (REITs/REOCs), and public debt (mortgage-backed securities/CMBS).

Name the three traditional approaches to appraising real estate value.

The cost approach, the sales comparison approach, and the income (capitalization/DCF) approach.

Write the direct capitalization formula for real estate value.

$Value = \dfrac{NOI}{\text{cap rate}}$, where $NOI$ is net operating income and the cap rate is the required income return; equivalently cap rate $=$ discount rate $-$ NOI growth rate.

How is net operating income (NOI) calculated in real estate?

$NOI = \text{rental income (at full occupancy)} - \text{vacancy and collection loss} + \text{other income} - \text{operating expenses}$, before financing costs and income taxes.

What is a REIT and its key income distribution requirement?

A Real Estate Investment Trust is a listed or public vehicle holding income-producing real estate; to avoid corporate tax it must distribute most (e.g., about 90%) of taxable income to shareholders.

Distinguish FFO and AFFO for valuing REITs.

Funds from operations (FFO) = net income + depreciation + deferred taxes - gains on property sales. Adjusted FFO (AFFO) = FFO - non-cash rent - recurring maintenance capex, giving a better measure of sustainable, distributable cash flow.

Define commodities as an investment and how most investors gain exposure.

Commodities are physical goods (energy, metals, agriculture, livestock). Most investors gain exposure through derivatives (futures) rather than physical holding, avoiding storage and transport costs.

What are the three components of total return on a commodity futures position?

$\text{Total return} = \text{price (spot) return} + \text{roll return (yield)} + \text{collateral return}$.

Distinguish contango and backwardation in commodity futures.

Contango: futures price above the spot price (upward-sloping curve), producing a negative roll return. Backwardation: futures price below the spot price (downward-sloping curve), producing a positive roll return.

State the theory that links convenience yield to backwardation.

Under the theory of storage, the futures price $F = S(1+r) + \text{storage costs} - \text{convenience yield}$; a high convenience yield (benefit of holding the physical good) pushes the market into backwardation.

Define infrastructure investments and their key economic characteristics.

Investments in long-lived, capital-intensive real assets that provide essential public services (roads, utilities, airports). They typically offer stable, often inflation-linked cash flows, low volatility, and low correlation with other assets.

Distinguish brownfield and greenfield infrastructure investments.

Brownfield: existing infrastructure assets already in operation, offering lower risk and current cash flow. Greenfield: assets to be constructed or developed, carrying higher construction/demand risk and potential for capital appreciation.

Distinguish economic and social infrastructure assets.

Economic infrastructure supports economic activity (transportation, utilities, communication networks); social infrastructure supports public services (schools, hospitals, prisons).

What is a common way to invest in infrastructure that combines equity ownership with public-market liquidity?

Publicly listed infrastructure vehicles such as master limited partnerships (MLPs) and infrastructure funds/ETFs, or public-private partnerships (PPPs) for direct project involvement.