Re Transactions Assgnment

RE Transactions

HW #4

10/20/15

1.a) Assuming the gross asset returns for each individual property investment come in exactly as expected, does that mean that investors will get the expected net return?

No, the promote reduces the returns above the preferred return so the overall expected net return of the distribution of returns should be lower than the gross return. The risk is also reduced but this is just an illusion as the distribution is asymmetric therefore downside risk is the same.

b) How important is the preferred return? As the preferred return sets the target return for the fund before alpha is generated by the investment manager the preferred return is extremely important. Without a preferred return it is very difficult to allocate a performance fee to the investment manager since they could get a promote on the return of the asset without truly adding value to the fund.

c) How important is “crossing” all of the deals with respect to the promote? This is also very important because one can have very successful deals while others are terrible, so on a deal by deal basis, you could calculate a positive promote without considering the “negative promote” of the poor deals. Also, by considering the size of each investment, one can obtain a positive promote for a small deal but then have a low return for a huge deal making the overall fund underperform its target while charging a promote. Without looking at every deal with respect, you can skew the results of the overall portfolio.

2. For both value-add and opportunistic fund structures, how do you think about:

a) The total cost of that manager? Many different ways to charge fees in the funds exist so it is necessary set everything to an equivalent metric such as Gross Asset Value. Value-add and opportunistic funds have significant leverage and transactional fees which complicate the calculation of total manager cost versus a core fund. To get a true equal comparison, you need to consider...