PE: undrawn LP capital commitments

CFA Level II
#1

Anybody hot on PE, can you please explain what are these and whats got to do with NAV? (SS13, Schweser pp378) Got no background on PE (or similar illiquid assets). Prefer stocks :stuck_out_tongue:

#2

undrawn :This is the capital which is not used by a GP. He will invest whenever opportunity comes. If the new investment has good returns, it will increase NPV and total return to investors.

#3

A GP will raise a sum of money, called the contributed capital. Over time he will use this money to make investments (the money used for investments is called paid in capital). paid in capital is used to compute the management fee. The NAV is total paid in capital plus any returns on that capital from the investments. Once NAV gets over the contributed capital amount the GP will often begin to collect carried interest on the amount in excess of contributed capital.

#4

Probably got confused with NAV as it is calculated for hedge funds. There, management fees are paid as a % of AUM, and not as a % of invested capital. If you are 80% invested (say liquid stocks) yr NAV is MV of stocks+cash (here 20%)-liabilities. But why undrawn LP capital commitments are essentailly liabilities for the LPs (at least according to Schweser) ???

#5

Undrawn capital commitments are liabilities because they represent a future outflow of capital. In the future, the GP will call down that undrawn capital. So when a person/company whatever holds cash that is owed to another person/company, it is a liability.

#6

So it is a liability for the GP and not the LP as it is stated in the text… Gosh i am so thick :PPP

#7

@memalos: No I am pretty sure the management fee is computed as a % of PIC not AUM (which is more like a NAV measure since it includes gains/losses; also note AUM isn’t a CFAI used term, and not one we will be tested on, the accepted CFAI terminology in this area is NAV). In fact I am sure of this since I just checked it.

#8

Can somebody please remind me of the ratios? Do they look right? PIC = Total Capital Called/Committed Capital D/P = Cumulative Distributions/Cumulative Capital Called (?) RVPI = NAV after distributions/remaining capital called (?) TVPI = D/P + RVPI

#9

@bipolar: DPI=Distributed Capital/Paid in Capital RVPI=NAV After distributions/Paid in Capital TVPI=DPI+RVPI

#10

@adavydov7: This is exactly wat am sayin dog… As for the ratios they are correct as stated above. Be careful on the NAV before and NAV after distribution. If you were to do it on an xls spreadsheet I bet u a 1,000 bucks u gonna create a circular reference :PP

#11

Okay good, I just got worried about the AUM reference (which is basically the NAV). Gotya on the NAV before and after, that can be a pest, luckily we don’t have excel on the exam:)

#12

In the REIT review, NAV is estimated on a book value basis as used to calculate NAVPS. But in the private equity session, 6 different calculation methods are given, including the market value! So NAV has different definitions in different senarios?

btw, can anyone pls explain “When a GP has trouble raising funds, this implies that the value of these commitments (undrawn LP capital commitments) is low” as quoted from the Schweser Notes? many thanks!