Guide to Alternatives

Objective Knowledge Center

Latest Analysis
Below are basic terms used in the Alternative Investments Sector, involves multiple professional definitions and terminology. You may wish to take a minute before you start reading our analyses and take a look at the following list, which contains important terms for your financial jargon.

An individual or institution with a high net worth, either as a result of his/its annual activities or the financial wealth owned by him/it. There are many funds in which only Accredited Investors are allowed to invest. To earn this status, the financial wealth of such investor should meet one of the following tests established in the March 2016 Addendum to the Securities Law: (a) the Asset Value test – the value of the liquid assets owned by the investor (financial assets, deposits and cash) exceeds NIS 8 million; (2) the Income test – in each of the past two years, the investor’s income has exceeded NIS 1.2 million, or the income of the family unit to which he belongs exceeded NIS 1.8 million; (3) the Combined test – the total value of liquid assets owned by such investor exceeds NIS 5 million, and in each of the past two years it has exceeded NIS 600 thousand, or the income of the family unit to which he belongs exceeds NIS 900 thousand.

The administrator’s duties include management of investor accounts, calculation of management fees, preparation of financial statements, management and technological backup of account books and registration of investors, calculation of the net asset value of the fund and of each investor’s investment, calculation of internal return rate (IRR), and assistance in the preparation of management reports.

A mechanism that calculates the fund’s performance fee on the excess return after the target return is met. If a catch-up mechanism is in place, the fund receives performance fees from the total earnings. For instance, if the performance fee is set at 20% above the 8% under the catch-up mechanism, then, should the fund obtain a 10% return, the investor receives an 8% return and the fund receives a 2% return. In the absence of such mechanism, in the case of a 10% return, the fund only receives 20% above the target return, i.e., 20% of 2%, which is 0.4%.

A fund with a fixed lifespan that typically does not allow redemptions or the entry of additional investors after the initial formation of the fund. Closed-end funds typically acquire a portfolio of companies/assets during an initial investment obligation period where the money can be called, and the investment is spread over this period. Funds have the option to ask investors to extend their lifespan, if additional time is needed to liquidate the assets.

Direct investment in an asset backed by a fund, mostly in reliance on the abilities of the fund manager. In most cases, the fund’s need for co-investment is derived from the size of the investment and the fund’s restrictions or risk management, and then the limited partners are called to make an additional capital contribution. It is customary, around the world, that in most cases the investment does not entail extra payment to the fund managers, other than management fees and performance fees for the component invested as part of the contribution obligation to the fund (although changes may occur also in this regard).

Raising funds provide investors with a document containing questions that are common among investors when considering an investment fund. The key issues contained in the document include general information about the general partner (GP) and the fund, the investment strategy and process, the market environment, the terms and conditions of the fund and its past performance.

The partner in a limited partnership that is responsible for all partnership management decisions. The general partner is responsible to act for the benefit of the limited partners and is fully responsible for the fund’s activities.

A mechanism that addresses the problem of the fund’s reward for poor performance. This mechanism ensures that the performance fee is only based on net new gains for each investor. The fund may not charge management fees until it recovers the losses for the investors, and only then performance fees are calculated. Should performance fees be charged, the collection date will serve as a new zero point for calculating performance fees.

The level of return to be obtained by the fund before it may charge performance fees.

Impact Investments, also known as Social Investments, are a relatively new term that has gained momentum in recent years. The objective of these investments is to generate a measurable social or environmental return, alongside an economic return. In order for an investment to be defined as an Impact Investment, two conditions must be met: (1) there should be an intention to solve a social problem with a measurable social impact; (2) there should be a business model that aims to generate an economic return.

A typical metric used for measuring performance and evaluating the feasibility of an investment. In technical terms, IRR is the discount rate, which makes the present value of the payments (e.g., a series of investments) equal to the present value of the receipts (the returns on the investments).

This means that IRR is the discount rate at which the net present value (NPV) of a set of future cash flows will equal zero. When budgeting capital, the interest rate that makes the net present value (NPV) of the cash flow equal to zero is often used.

In simple words, IRR calculates the return to be earned by the company should it expand or make its own investments instead of investing its money elsewhere. In evaluating the feasibility of an investment, the metric is used to evaluate whether the internal rate of return (IRR) is higher than the general price of the capital, in which case the investment is worthwhile, or lower than such price, in which case the investment is not worthwhile.

At the early stages of the fund, the investor’s revaluation may be negative (in relation to the amount of the investment) and even produce a loss. Mainly due to management fees and transaction expenses, in a manner that does not reflect the investment’s future performance. Thereafter, the cashflow becomes positive, and the value added to the property due to the fund manager’s skills, are reflected by a sharp increase on the curve, which is best observed when the investment is realized and corresponds the highest point on the curve. J-curve is the graph that shows this decrease, which is then followed by a greater increase, shaped similarly to the letter J.

For investors, this means that although they allocate funds to a private equity fund already from the start of its operations, a positive cash flow, which reached its peak upon the realization of the asset,  is only observed in the third or fourth year. In the case of an income-producing property, regular distributions will be made based on available cash flow, after capital investments in property improvement.

In investment funds, it is customary to define both a key person and a mechanism for the exit of such a key person, aimed to mitigate the negative impact on the fund’s investments. A key person can be a manager or a number of managers in the fund who are substantially involved in the fund’s activities and the day-to-day management of its investments. The choice to invest in the fund is, among other things, a choice in people, so there is a concern, on the part of the investors, that a key person might leave which will lead to a significant and dramatic effect on the fund’s activities. It is customary to establish a mechanism for a “principal event” that occurs when a key person exit or reduces the scope of its activity. In such cases, the fund is obligated to notify investors and sometimes even provides the option to leave the fund, terminating new investments until a new appointment is approved by the investors, and more.

An investor that provides financing to the partnership to enable it to operate, and thereby becomes eligible to participate in and benefit from its profits. The investor’s liability for the Company’s debts is limited to the amount contributed by such investor to the partnership, and nothing beyond that. This means that should the partnership fall into debts; the limited partner only risks the amount of capital contribution it originally put forth. The investor has rights and obligations in accordance with the fund’s policy.

An agreement that defines the relationship between the general partner and the limited partners. An LPA starts with a comprehensive and detailed set of definitions that thoroughly explain the meaning of all relevant terms included in the document. The core of the agreement is dedicated to other material aspects, such as the partners’ responsibilities, names, objectives, commencement and duration, and the primary place of business.

Another part explains the manner of investment through capital or debt, and includes details of all possibilities that may be encountered by the investors, such as the maximum number of days to carry out the necessary activities, the general partner’s rights in connection with capital increase, and all activities necessary for the formation of the fund.

This term is relevant to open-ended funds where the fund establishes a mechanism that allows the investor to redeem participation units. It is generally acceptable that, after the Lock-Up Period defined in the fund’s policy, the investor may redeem his investments at the end of each quarter, with 90 days prior notice. Where many investors seek to withdraw their investments, some funds may defer the redemption if the total redemption requests exceed a certain percentage of the asset value. In such a case, the fund may decide to suspend the redemptions for a fixed period of time, a partial repayment which will be divided pro rata among the applicants or a spread of the redemption for a certain period of time.

An annual fee charged to investors by the fund manager for as long as they are invested in the fund, with the amount of the fee varying according to the nature of the fund. Management fees are generally paid from the investor’s capital contribution to the fund. Some funds collect management fees only from the actual investments.

A fund with no finite or limited lifespan that allows the continuous entry and exit of investors, except during the Lock-Up Period, following which monies can be redeemed. The fund calls the investors to make their capital contributions on one occasion and executes the investments accordingly. Generally, investments in this type of funds are relatively liquid, to allow the fund to make its investments based on the value of the capital contribution made to the fund.

 A fee charged to the investor to reward the fund manager beyond a predetermined return threshold. This fee normally amounts to 20% of the fund’s return.

A legal document furnished to prospective investors when raising capital. The document reveals all information that the investor should be aware of to make a reasoned investment decision prior to making an investment. The PPM sets out, inter alia, the investment opportunity as well as legal obligations, and explains the risk of losses. The disclosures included in the PPM vary depending on the complexity of the offering and its terms and conditions.

Defined as the first year of investment in the fund. Particular importance is attached to this term as a criteria for comparison between different funds. Each year is characterized by a different economic environment, and therefore, special focus is given to the comparison between funds from the same vintage.

discliamer

  • The analyses published on this Website are based on data obtained by the analysis editor from fund managers which include answers to questionnaires provided to them, various documents provided by the fund on request, market and trading data from the trading systems, if any, and opinions that reflect the subjective point of view of the analysis editors alone, but which to not address the investment’s adequacy to the needs of a particular investor, or in general.
  • The editors of the analyses published on the Website are not obligated to update the analysis from time to time or at all, and therefore, each analysis contained on the Website is relevant as of the date of its preparation.
  • The analyses published on the Website do not constitute a recommendation to carry out transactions involving interests in funds, nor do they constitute an investment advice within the meaning of the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 5755-1995, or an offer to purchase interests in the funds under review.
  • An investment in an equity fund, by nature, involve risks, including risks arising from the character and terms of investments managed on behalf of the fund, the manner of managing them as well as risks beyond the control of the fund, such as risks arising from macroeconomic changes. It is clarified that the content of the analysis does not constitute legal or tax advice relating to the investment in investment funds and/or a particular fund. Each investor is advised to consult with other competent advisors to evaluate the investment in the fund.
  • Any investment in the fund must only be made in accordance with the legal documents of the fund and the terms and conditions contained therein, after the investor has obtained all relevant legal documents, reviewed them in person, at his own expense, and signed them.
  • Each analysis contains projections, estimates, and other forward-looking information, the materialization of which is uncertain. Facts and data contained in each analysis are as of the date the analysis was performed, without any certainty that the projections and estimates described therein would materialize. Moreover, the results of such projections and estimates may be materially different than those described in the analysis.
  • The Company and/or any of its executives and/or representatives and/or anyone acting on its behalf assumes no liability for any direct or circumstantial loss resulting from the investment in the funds under review.
  • The analyses published on the Website are the exclusive property of Objective. No document or analysis contained on the Website may in whole or in part be copied, distributed or transferred, and the information contained on the Website may not, in whole or in part, be disclosed to third parties by any means whatsoever.