Tuesday, June 30, 2009
BOSTON (Reuters)—Hedge funds are living up to their high-flying reputation again with strong returns in the last three months, but many investors burned by last year's losses are clamoring for reforms before committing new money.
Final June quarter data will not be released until next week, but Merrill Lynch analysts who track returns in the $1.3 trillion industry wrote on Monday [June 29] that hedge funds will likely post their best quarterly performance since early 2000.
The rebound became visible in April when the average hedge fund returned 2.7%. It gained strength in May with a 4.4% rise, Merrill Lynch analysts wrote. For the second quarter, they estimate a gain of 6% or more.
That would mark a dramatic recovery from 2008 when the average hedge fund lost 19% and some celebrated funds, including Citadel Investment Group LLC, run by Kenneth Griffin, the 41-year-old Chicago billionaire, were down as much as 50% at the height of the financial crisis.
This year's stock rally, sparked by hopes that the worst of the global economic downturn is over, has helped boost many funds' returns.
Tudor BVI Global Fund, run by Paul Tudor Jones of Tudor Investment Corp., gained 12.4% through the end of May, while Lee Ainslie's Maverick Fund gained 8.8% through the end of May, their investors said.
"I believe there's been a very big change of mood and it has come at least three months earlier than I was expecting," said Christopher Fawcett, chief executive of hedge fund firm Fauchier Partners in London.
Last year, pension funds, endowments and wealthy individuals reacted to hedge funds' heavy losses and high fees by demanding a record $152 billion back in the last three months of 2008, research firm Hedge Fund Research said. This year, the pace of redemptions has slowed. In the first quarter, investors pulled $103 billion, according to HFR.
In May, hedge funds saw inflows of $3.4 billion, their first inflows since May last year, researchers at TrimTabs found.
"Redemptions have really dried up," said Mark Kary, chief executive of hedge fund firm Polar Capital in London, noting that his firm also saw small net inflows in the second quarter.
While inflows are still small, industry researchers said they played a critical role by letting hedge funds stop selling market positions to raise cash needed to let investors out.
"The inflows kept hedge funds from being a drain on the markets," TrimTabs President Conrad Gann said.
Pension funds and other investors have said they plan to commit more money to hedge funds in the second half of 2009, but they are also ready to attach conditions about how their money will be invested and a right to get it back fast.
"Transparency, liquidity, good fee terms, no gates, no side pockets. That is what the institutional community will be pressing hedge funds for," said Eric Goodbar, hedge fund strategist at Mellon Capital Management, a unit of Bank of New York Mellon Corp. "Hedge funds that are essentially large lockup structures will be viewed with caution."
By Svea Herbst-Bayliss and Laurence Fletcher
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Wednesday, July 1, 2009
Wednesday, June 17, 2009
The LTV, IRR, DSCR And ROI: Ensuring Accurate Numbers
The majority of real estate investment and development decisions are numbers driven, but it
is important to realize that not all parties are concerned with the same numbers. Therefore, each party in a given real estate transaction would benefit from a greater understanding of the matrices that are important to the others involved.
For example, when an investor is talking to a lender about a transaction, it may not make sense to discuss internal rate of return (IRR) or equity multiples, but it would be very important to bring up the maximum allowable loan-to-value (LTV) ratio. Or, when a developer is trying to raise equity, the investors may not care much about debt service coverage ratios (DSCRs), but they may be very concerned with the cash-on-cash return, for example.
Consequently, it is important to understand each of these matrices and how they are derived. For many of the more complex calculations, participants may find it easier to use Excel or some other spreadsheet software to calculate these numbers. Please refer to the corresponding figures to learn how to input these formulas into the spreadsheets or otherwise perform the calculations. Equity for real estate investments can come from a number of different sources.
Many small investors and developers raise equity from friends and family or from high-net-worth individuals that they may know. Larger real estate companies may have their own dedicated capital, or they may be partnered with opportunity funds or other institutional investors. Regardless of the source, calculating the performance of each invest-ment is essential, and the three most common matrices used are IRR, cash-on-cash return and equity multiple. Using these matrices enables investors to evaluate the expected performance of each investment and compare it to other possible investments.
The IRR is usually the first number that most institutional equity groups ask for when they are presented with a new real estate investment. For a given investment, the IRR is the discount
rate that makes the net present value of all cashflows equal to zero. When calculating an IRR, you must remember to discount negative cashflows in future years back to time zero at a safe rate. Doing so is necessary because the calculation built into the IRR function in most software will assume that these cashflows are discounted at the IRR. Obviously, this assumption causes investors to set aside insufficient cash to fund these future shortfalls.
It is possible to use the modified modified IRR (MIRR) function on many spreadsheets, but then you must also decide upon a reinvestment rate for future positive cashflows. At the
current time, most institutional real estate investors are still using IRR over MIRR and are typically interested in both un-levered and levered IRRs. The un-levered IRR for a project is
calculated using the cashflows before debt service. Although most investors prefer to use some level of leverage when purchasing properties, the un- levered IRR is still very useful.
Remember that when you leverage an investment, you are adding additional risk. Therefore, an un-levered IRR is closer to a risk-adjusted return than a levered IRR. The levered IRR is calculated using cashflows after loan proceeds and debt service. This figure is usually the number that investors are most concerned with, as it is a good indication of the actual return that they will receive on their investment. Each institution’s criteria for investing are different: Core investors may be happy with levered IRRs in the mid-teens, while value-add and opportunistic investors often look for mid-high twenties or better.
While the IRR displays an investment’s performance over the investment’s entire holding period, many investors are interested in that performance at a given point in time. This performance can be measured as a return on investment (ROI) or cash- on-cash return.
The ROI for a given investment can be measured by subtracting the cost of the investment from the gain from the investment and then dividing the difference by the cost of the investment.
The cash-on-cash return is calculated in a similar way, but it uses cashflows after loan proceeds and debt service. The cash-on-cash return is important to investors who are seeking
current income. Equity investors also want to know how many dollars they are going to receive over the entire holding period for each dollar that they invest. This is often referred to as the equity multiple or holding period return. It is typical for investors to get a minimum
of two times their initial investment back out over time.
From a recent article in:
Commercial Mortgage Insight
August 2008 issue
By Joseph R. CaCCiapaglia
Tuesday, June 9, 2009
CalPERS To Boost Private Equity Target
June 9, 2009
Aiming to buy low, the nation’s largest public pension fund is poised to increase its private equity investments by about 40%.
The California Public Employees’ Retirement System is set to approve an increased target for corporate buyout and venture capital investments to 14%, up from 10%. Under the plan, private equity and venture capital investments could reach 19% of the fund’s total assets; currently, CalPERS invests 13% in the asset classes.
“This is a great time to make some good deals,” spokesman Clark McKinley told Reuters. “when markets are down, it’s a good time to buy.”
The boost to p.e. and VC comes at the expense of CalPERS’ equity portfolio, which includes hedge funds. The pension giant has no plans to change its hedge fund allocations, McKinley said, but losses by the hedge funds and other equity managers employed by CalPERS have effectively cut its exposure to them.
From FINalternatives June 9, 2009
Aiming to buy low, the nation’s largest public pension fund is poised to increase its private equity investments by about 40%.
The California Public Employees’ Retirement System is set to approve an increased target for corporate buyout and venture capital investments to 14%, up from 10%. Under the plan, private equity and venture capital investments could reach 19% of the fund’s total assets; currently, CalPERS invests 13% in the asset classes.
“This is a great time to make some good deals,” spokesman Clark McKinley told Reuters. “when markets are down, it’s a good time to buy.”
The boost to p.e. and VC comes at the expense of CalPERS’ equity portfolio, which includes hedge funds. The pension giant has no plans to change its hedge fund allocations, McKinley said, but losses by the hedge funds and other equity managers employed by CalPERS have effectively cut its exposure to them.
From FINalternatives June 9, 2009
Thursday, May 21, 2009
1031 Energy: Comparing Oil and Gas Property Ownership to Real Estate TIC Property Ownership
Comparing Oil and Gas to TICs and associated Taxes
Like Tenant-in-Common property (TIC), oil and gas properties (O&G) produce a monthly cash flow, require little management and have intrinsic value. However, unlike conventional TICs, they are diversified both by geography and product and generally do not require investors to sign personal guarantees. Most O&G replacement properties enjoy cash flow from a combination of oil and natural gas production. Because the O&G market is worldwide, or at least regional, they also generally minimize locale-specific economic trends and operator-specific business issues.
Additionally, purchase of O&G assets can provide investors with portfolio diversification, especially if an investor has a significant portion of his or her net worth in real estate. This diversification can be prudent because there is low correlation historically between O&G property value and commercial real estate property value.
While O&G production properties are not risk free, risk of investment is comparable to real estate TIC assets. The monthly production capacity in any given O&G property tends to average out to a known rate, and income fluctuation is mostly dependent on energy prices the higher the price of energy commodities, the greater the income.
Having O&G assets in your investment portfolio may help distribute or diversify risk away from factors that may devalue other kinds of assets. Individual real estate properties often carry local/regional risk because they are often strongly tied to local economic and development trends whereas ownership of geographically diverse energy-based investments offers a degree of insulation from local trends. O&G investments are instead often subject to production risks and O&G market risk. O&G assets also can serve as a hedge against rising energy prices. Other portions of your portfolio would tend to decrease as energy prices increase (certain stocks/certain real estate). Moreover, long-term performance history of O&G properties has shown only weak (or negative) correlation to Wall Street.
Although private placements are generally limited to investors who are not buying with a view to distribution, there can be a number of situations where an investor can need or desire liquidity. Generally, energy properties are more liquid than TICs. Partial or complete divestment can often be accomplished rapidly through a variety of existing and established methods, ranging from direct transfer/sale (usually 15-30 days), to online auctions (typically lasting 30 days), to traditional auctions through specialized auction houses (typically around 60 days) or divestment/brokerage firms (usually 45-60 days). The options in the liquidity spectrum for energy assets offer turn-around that can be as little as two weeks, and put your offerings into active, highly-competitive bidding environments to optimize the sale price of your properties.
Congressional Incentives Encourage Domestic Petroleum Development
Oil and Natural gas from domestic reserves helps to make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Drilling projects offer many tax advantages and these benefits greatly enhance the economics. These incentives are not "Loop Holes" -- they were placed in the Tax Code by Congress to make participation in oil and gas ventures one of the best tax advantaged investments.
Intangible Drilling Cost Tax Deduction
The intangible expenditures of drilling (labor, chemicals, mud, grease, etc.) are usually about (65 to 80%) of the cost of a well. These expenditures are considered "Intangible Drilling Cost (IDC)", which is 100% deductible during the first year. For example, a $100,000 investment would yield up to $75,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital. (See Section 263 of the Tax Code.)
Tangible Drilling Cost Tax Deduction
The total amount of the investment allocated to the equipment “Tangible Drilling Costs (TDC)” is 100% tax deductible. In the example above, the remaining tangible costs ($25,000) may be deducted as depreciation over a seven-year period. (See Section 263 of the Tax Code.)
Active vs. Passive Income
The Tax Reform Act of 1986 introduced into the Tax Code the concepts of "Passive" income and "Active" income. The Act prohibits the offsetting of losses from Passive activities against income from Active businesses. The Tax Code specifically states that a Working Interest in an oil and gas well is not a "Passive" Activity, therefore, deductions can be offset against income from active stock trades, business income, salaries, etc. (See Section 469(c)(3) of the Tax Code).
Small Producers Tax Exemption
The 1990 Tax Act provided some special tax advantages for small companies and individuals. This tax incentive, known as the "Percentage Depletion Allowance", is specifically intended to encourage participation in oil and gas drilling. This tax benefit is not available to large oil companies, retail petroleum marketers, or refiners that process more than 50,000 barrels per day. It is also not available for entities owning more than 1,000 barrels of oil (or 6,000,000 cubic feet of gas) average daily production. The "Small Producers Exemption" allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free.
Lease Costs
Lease costs (purchase of leases, minerals, etc.), sales expenses, legal expenses, administrative accounting, and Lease Operating Costs (LOC) are also 100% tax deductible through cost depletion.
Alternative Minimum Tax
Prior to the 1992 Tax Act, working interest participants in oil and gas ventures were subject to the normal Alternative Minimum Tax to the extent that this tax exceeded their regular tax. This Tax Act specifically exempted Intangible Drilling Cost as a Tax Preference Item. "Alternative Minimum Taxable Income" generally consists of adjusted gross income, minus allowable Alternative Minimum Tax itemized deduction, plus the sum of tax preference items and adjustments. "Tax preference items" are preferences existing in the Code to greatly reduce or eliminate regular income taxation. Included within this group are deductions for excess Intangible Drilling and Development Costs and the deduction for depletion allowable for a taxable year over the adjusted basis in the Drilling Acreage and the wells thereon.
Tax Bill Gives Incentive to Marginal Wells
The US Senate and House of Representative have passed a tax incentive bill to help small oil and gas producers. This bill provides a tax credit of up to $9 per well per day for marginal wells. A typical marginal well pumps 15 barrels of crude or 90 thousand cubic feet of gas per day. There are 650,000 “marginal” or “stripper” oil and gas wells in the USA. Marginal wells provide as much as 25 percent of the nations’ crude supply (on par with Saudi Arabia ) and about 10 percent of gas stocks. In 2002 alone, 17000 oil and gas wells were permanently plugged with cement (13,600 oil wells and 3,900 gas wells). This tax bill will act as a safety net to save many of these wells, thereby reducing our reliance on the Middle East.
From Houston Chronicle, October 12, 2004
Like Tenant-in-Common property (TIC), oil and gas properties (O&G) produce a monthly cash flow, require little management and have intrinsic value. However, unlike conventional TICs, they are diversified both by geography and product and generally do not require investors to sign personal guarantees. Most O&G replacement properties enjoy cash flow from a combination of oil and natural gas production. Because the O&G market is worldwide, or at least regional, they also generally minimize locale-specific economic trends and operator-specific business issues.
Additionally, purchase of O&G assets can provide investors with portfolio diversification, especially if an investor has a significant portion of his or her net worth in real estate. This diversification can be prudent because there is low correlation historically between O&G property value and commercial real estate property value.
While O&G production properties are not risk free, risk of investment is comparable to real estate TIC assets. The monthly production capacity in any given O&G property tends to average out to a known rate, and income fluctuation is mostly dependent on energy prices the higher the price of energy commodities, the greater the income.
Having O&G assets in your investment portfolio may help distribute or diversify risk away from factors that may devalue other kinds of assets. Individual real estate properties often carry local/regional risk because they are often strongly tied to local economic and development trends whereas ownership of geographically diverse energy-based investments offers a degree of insulation from local trends. O&G investments are instead often subject to production risks and O&G market risk. O&G assets also can serve as a hedge against rising energy prices. Other portions of your portfolio would tend to decrease as energy prices increase (certain stocks/certain real estate). Moreover, long-term performance history of O&G properties has shown only weak (or negative) correlation to Wall Street.
Although private placements are generally limited to investors who are not buying with a view to distribution, there can be a number of situations where an investor can need or desire liquidity. Generally, energy properties are more liquid than TICs. Partial or complete divestment can often be accomplished rapidly through a variety of existing and established methods, ranging from direct transfer/sale (usually 15-30 days), to online auctions (typically lasting 30 days), to traditional auctions through specialized auction houses (typically around 60 days) or divestment/brokerage firms (usually 45-60 days). The options in the liquidity spectrum for energy assets offer turn-around that can be as little as two weeks, and put your offerings into active, highly-competitive bidding environments to optimize the sale price of your properties.
Congressional Incentives Encourage Domestic Petroleum Development
Oil and Natural gas from domestic reserves helps to make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Drilling projects offer many tax advantages and these benefits greatly enhance the economics. These incentives are not "Loop Holes" -- they were placed in the Tax Code by Congress to make participation in oil and gas ventures one of the best tax advantaged investments.
Intangible Drilling Cost Tax Deduction
The intangible expenditures of drilling (labor, chemicals, mud, grease, etc.) are usually about (65 to 80%) of the cost of a well. These expenditures are considered "Intangible Drilling Cost (IDC)", which is 100% deductible during the first year. For example, a $100,000 investment would yield up to $75,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital. (See Section 263 of the Tax Code.)
Tangible Drilling Cost Tax Deduction
The total amount of the investment allocated to the equipment “Tangible Drilling Costs (TDC)” is 100% tax deductible. In the example above, the remaining tangible costs ($25,000) may be deducted as depreciation over a seven-year period. (See Section 263 of the Tax Code.)
Active vs. Passive Income
The Tax Reform Act of 1986 introduced into the Tax Code the concepts of "Passive" income and "Active" income. The Act prohibits the offsetting of losses from Passive activities against income from Active businesses. The Tax Code specifically states that a Working Interest in an oil and gas well is not a "Passive" Activity, therefore, deductions can be offset against income from active stock trades, business income, salaries, etc. (See Section 469(c)(3) of the Tax Code).
Small Producers Tax Exemption
The 1990 Tax Act provided some special tax advantages for small companies and individuals. This tax incentive, known as the "Percentage Depletion Allowance", is specifically intended to encourage participation in oil and gas drilling. This tax benefit is not available to large oil companies, retail petroleum marketers, or refiners that process more than 50,000 barrels per day. It is also not available for entities owning more than 1,000 barrels of oil (or 6,000,000 cubic feet of gas) average daily production. The "Small Producers Exemption" allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free.
Lease Costs
Lease costs (purchase of leases, minerals, etc.), sales expenses, legal expenses, administrative accounting, and Lease Operating Costs (LOC) are also 100% tax deductible through cost depletion.
Alternative Minimum Tax
Prior to the 1992 Tax Act, working interest participants in oil and gas ventures were subject to the normal Alternative Minimum Tax to the extent that this tax exceeded their regular tax. This Tax Act specifically exempted Intangible Drilling Cost as a Tax Preference Item. "Alternative Minimum Taxable Income" generally consists of adjusted gross income, minus allowable Alternative Minimum Tax itemized deduction, plus the sum of tax preference items and adjustments. "Tax preference items" are preferences existing in the Code to greatly reduce or eliminate regular income taxation. Included within this group are deductions for excess Intangible Drilling and Development Costs and the deduction for depletion allowable for a taxable year over the adjusted basis in the Drilling Acreage and the wells thereon.
Tax Bill Gives Incentive to Marginal Wells
The US Senate and House of Representative have passed a tax incentive bill to help small oil and gas producers. This bill provides a tax credit of up to $9 per well per day for marginal wells. A typical marginal well pumps 15 barrels of crude or 90 thousand cubic feet of gas per day. There are 650,000 “marginal” or “stripper” oil and gas wells in the USA. Marginal wells provide as much as 25 percent of the nations’ crude supply (on par with Saudi Arabia ) and about 10 percent of gas stocks. In 2002 alone, 17000 oil and gas wells were permanently plugged with cement (13,600 oil wells and 3,900 gas wells). This tax bill will act as a safety net to save many of these wells, thereby reducing our reliance on the Middle East.
From Houston Chronicle, October 12, 2004
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