Private Equity

The section of the CFAI material on private equity is really confusing and badly organized… or is it just me?

just you :). Wait until you get to GIPS.

It seems that all Alt Investments are organized the same, LOS d-f, and then there are specific LOs for each.

It is not that much the table of content and how they approach the topic overall that I find messy, but the detailed content itself. I work in private equity myself and this is a very easy chapter to me, but still I find it totally confusing

Completely agree. Hedge funds is even worse.

There are some information I even disagree with.

In the answer to Question 8 of the practice exams of the reading on alternative investments, they state that “management fee [is] based on net asset value”.

From my experience, I have never seen than. I don’t know if they refer to private equity of hedge funds here, but Management fees in private equity are based on LP commitments, at least during the investment phase, and then decrease with a computation basis that varies (like drawdowns minus acquisition costs of exits for example) but NAV is way too judgmental in terms of valuation to use it as a basis to compensate the GP. Then he would be tempted to inflate it.

Also the term drawdown (same question of the practice problems) they define as a decline or loss in the asset value. Well a drawdown from the mouth of a GP is just a capital call, that what’s I have always heard (and I hear the word quite often), and investopedia confirms:

http://www.investopedia.com/articles/stocks/09/abcs-of-private-equity.asp

Actually the issue I was mentioning above with the basis of computation of Management fees is a real issue because EOC question 33 of Alternative Investments also states that the basis of computation is “the fund’s assets”. Here they are clearly talking about hedge funds though, and not private equity.

Can someone please tell me what is the market practice for hedge funds?

you may disagree with everything the CFAI says - but please do that on your own - after you have passed the exam. Please put aside your feelings / emotions / any prior knowledge you may have from having been in the industry - use it all when you are at work. But after work - or when you are preparing for this exam please Do not even breathe, think, or talk about those concepts while you are trying the write this exam - you have 6 more months (give or take a few days to go) - I am sure you can do this for that time period - and if you do - you will pass the exam. There is a lot of stuff which is not how the industry does it, but the text and the EOC questions expect you to learn the material in a certain way - and believe me - the exam will test you ONLY in that way.

Additionally - it also does not help anyone else who is in the same boat as you are - trying to study for this exam - by writing out what you think is industry practice - or where you think the CFAI got it wrong. It will not help anyone.

Thanks for understanding. Pretty sure what is written in the EOC answer is what the book has in the reading itself.

Cpk123, i was really surprised by your reaction. You cannot tell me to learn things by heart without bothering and you can’t forbid me to use my brain. If not using their brains makes it easier for some people to pass the exam (i am sure some people can do that and good for them. It’s called cramming and unfortunately i am not good at that), you can’t expect everyone to be like that. Also, if for some people passing the exam is the only thing that matters, for some others, it’s not just about the stamp on the CV, it’s also about learning. Now if some people don’t want to understand and just want to learn by heart, I am sure they will feel free to skip my posts, and probably this forum in general. Otherwise we can open a discussion on this or that topic if they feel like it. If you want to take a shortcut, then apply for a fund of fund in private equity, boast about everything you learnt from the cfa and then claim that Management fee is computed based on NAV, you’ll really lose all credibility. But maybe it’s the case for hedge funds, that’s why i am asking because some forum members may explain me that this applies there and that this was what the course was referring to. I am not questionning the whole curriculum, i am at volume 5 and have already asked a lot of my questions on the forum this year. I just think it is fair to make sense out of the material. Now if i figure out that some things in the curriculum totally contradict market practice, i will still end up retaining the required info for the exam but i will still be satisfied to have my own opinion about it. I know that you said that to help, and i see your point, but i am just not like that and it does not work for me. So if i can continue to apply my freedom of expression on this forum, i would appreciate.

go ahead and express your freedom on the forum. I did not stop you from doing that.

And I did not tell you not to use your freedom of expression either at all.

I am just telling you what many others have stated before on the forum - and I have been here long enough to see that happening. There is a certain way the CFAI has its material laid out - and maybe most of it is US centric - but this has been stated many times in the past - that this is not the way we do things in our fund / practice.

Most often - the folks have been asked to keep their thoughts to themselves - there is the CFAI way - for the exam purposes - and there is the practice way - which does not work for the CFAI exam.

I was just telling you to keep your thoughts (of the practice / right way (maybe) ) to yourself - till you pass the exam using the CFAI way.

That was just 2c of my thoughts to help you clear the hurdle, then do whatever your practice tells you to do.

I did not tell you do NOT USE YOUR BRAIN. I asked you to make a separation between what the CFAI states is the method to be followed and what you think should be followed. It is like you have to create a vacuum for the next 6 months - pass the exam - then do whatever you want. What works in your practice, even with your years of experience - is not what the CFAI wants - and they create the exam and grade you on the exam as well. Just realize that truth - and work with the CFAI way for the time being.

‘max drawdown’ is a performance measure for hedgefunds

https://en.wikipedia.org/wiki/Drawdown_(economics)

if for PE it means something else, please write an email to cfai pointing out the error.

i’ve done this plenty of times myself and they normally pass your message onto the author.

https://en.wikipedia.org/wiki/Capital_call

(it could be just a colloquialism in europe?)

Good point. I checked and I can’t tell for sure. The funds I am working with are everywhere in the world, some use the words “capital call” and some “drawdowns”, but, it’s true that the US fund I am following rather uses “capital call”. Investopedia, however, is an American website. But well, after all this discussion at least I have retained that the CFA uses “drawdowns” for impairment :wink:

Would someone still be able to answer to my question about Management fees?

Disregarding any other disagreement that I mentioned earlier on what the CFAI material states, there seems to be some contradictions in the course.

The CFAI material (Alternative Investments, section Private equity) states “The management fee is usually a percentage of limited partner commitments to the fund”.

In EOC question 8 of Alternative Investments, they state that “management fee [is] based on net asset value” (not sure if they are talking about hedge funds or private equity or both). EOC question 33 of Alternative Investments also states that the basis of computation is “the fund’s assets”. Here they are clearly talking about hedge funds though, and not private equity.

So, commitments or NAV?

q8 clearly talks about high water mark and drawdowns …

this thus is clearly for a hedge fund …

and so private equity should not even come to thought there, should it?

Ah ok, thanks.

So should I conclude that we should answer “AuM computed based on NAV” when they talk about hedge funds and “AuM computed based on investors’ commitments” when they refer to PE?

Thanks!