LEARNING MODULE SELF-ASSESSMENT

1. Identify which of the following choices is most likely an alternative

investment:
A. An investment in a hedge fund focused on traditional assets
B. Shares in a manufacturing firm traded on the Bursa Malaysia exchange
C. A euro foreign exchange future purchased on the Chicago Mercantile
exchange
Solution:
The correct answer is A. An investment in a hedge fund, even one that
purchases traditional exchange-traded assets, is considered an alternative
investment. B is incorrect because shares traded on a public exchange, such
as the Bursa Malaysia exchange, are considered traditional, not alternative,
investments. C is incorrect because a euro foreign exchange future pur-
chased on a public exchange, such as the Chicago Mercantile exchange, is
considered a traditional, not an alternative, investment.

2. An advantage of investing in alternative investments most likely is:

A. high liquidity.
B. low investment fees.
C. higher expected returns.
Solution:
The correct answer is C. Investors are often attracted to alternative invest-
ments seeking greater diversification and/or higher expected returns. A is
incorrect because investors usually face longer investment periods, reduced
liquidity, and less efficient markets with alternative investments than with
more traditional assets. B is incorrect because alternative investments often
carry higher fees, including performance and/or incentive fees.
Introduction 5

3. Investors with limited experience most likely enter into alternative invest-
ments through:
A. co-investing.
B. fund investing.
C. direct investing.
Solution:
The correct answer is B. Investors with limited resources and/or experience
generally enter into alternative investments through fund investing, where
the investor contributes capital to a fund and the fund identifies, selects, and
makes investments on the investor’s behalf. A is incorrect because co-in-
vesting is more appropriate for investors who already have some experience
investing in funds; in co-investing, the investor invests in assets indirectly
through the fund but also possesses rights (known as co-investment rights)
to invest directly in the same assets. C is incorrect because direct invest-
ing, which occurs when an investor makes a direct investment in an asset
without the use of an intermediary, is typically reserved for larger and more
sophisticated investors.

4. When an investor invests in an asset without the use of an intermediary, it is

called:
A. co-investing.
B. fund investing.
C. direct investing.
Solution:
The correct answer is C. In direct investing, an investor makes a direct
investment in an asset without the use of an intermediary. A is incorrect
because in co-investing, an investor invests in assets indirectly through a
fund but also possesses rights (known as co-investment rights) to invest
directly in the same assets. B is incorrect because for fund investing, an in-
vestor contributes capital to a fund and the fund, not the investor, identifies,
selects, and makes investments on the investor’s behalf.

5. Which statement regarding alternative investment partnership structures is

most accurate?
A. The fund manager has limited liability for anything that goes wrong.
B. The fund manager is a limited partner, and investors are general
partners.
C. Investors’ upfront cash outflow can be a small portion of their total
commitment to the partnership.
Solution:
The correct answer is C. Limited partners (LPs) are outside investors who
own a fractional interest in the partnership based on the amount of their
initial investment and the terms set out in the partnership documentation.
LPs commit to future investments, and their upfront cash outflow can be a
small portion of their total commitment to the fund. A is incorrect because
the fund manager is the fund’s general partner (GP) who runs the business
and theoretically bears unlimited liability for anything that goes wrong. B
is incorrect because the fund manager is the fund’s general partner, not a
limited partner, and the investors are the limited partners.
6 Learning Module 1 Alternative Investment Features, Methods, and Structures

6. After failing to meet the hurdle rate, which of the following would a general
partner still most likely receive as compensation?
A. Carried interest
B. Management fee
C. Committed capital
Solution:
The correct answer is B. Alternative investment funds are usually structured
with a management fee typically ranging from 1% to 2% of assets under
management (e.g., for hedge funds) or 1% to 2% of committed capital (e.g.,
for private equity funds). (Committed capital is the total amount of money
that the limited partners have committed to the fund’s future investments.)
A performance fee (also referred to as an incentive fee, carried interest, or
carry) is applied based on excess returns. The partnership agreement usually
specifies that the performance fee is earned only after the fund achieves a
return known as a “hurdle rate.” The hurdle rate is a minimum rate of return
that the general partner must exceed in order to earn the performance fee.
A is incorrect because “carried interest” is another name for a performance
fee, which is earned only after the fund achieves its hurdle rate. C is in-
correct because committed capital is the total amount of money that the
limited partners have committed to the fund’s future investments, not a fee
to the general partner.
QUESTION SET

1. Tangible physical assets that generate current or expected future

cash flows and/or are considered a store of value are best labeled as:
A. real assets.
B. private equity.
C. venture capital.
Solution:
The correct answer is A. In contrast to financial assets, real assets are
generally tangible physical assets that generate current or expected future
cash flows and/or are considered a store of value. Major categories of real
assets include real estate and natural resources, as well as intangibles such
as patents. B is incorrect because private equity, considered an alternative
investment, is non-publicly traded capital that is invested directly in private
companies (or in public companies that are being taken private). It is typi-
cally used to invest in firms in the mature life-cycle stage or in decline. C is
incorrect because venture capital is ownership capital used for non-public
companies in their early life cycle or startup phase.
 Exhibit 3: Tenderledge Investment Fund VIII Limited Partner Agreement
Term Sheet

Tenderledge Investment Fund VIII, L.P.

Term Sheet
Fund Tenderledge Investment Fund VIII, L.P
General Partner Tenderledge Investment LLC
Fund Manager Tenderledge Investments
Maximum Size Not to exceed USD750 million
Equal to at least 2% of the aggregate Commitments of the
General Partner’s Limited Partners
Commitment The date the General Partner determines that aggregate
Initial Closing Date Commitments equal or exceed USD500 million
Final Closing Date Twelve (12) months from the Initial Closing Date
Term of the Fund Ten (10) years from the Initial Closing Date
Investment Policy To provide attractive, long-term investment return from a diver-
sified portfolio of alternative investments
ESG In accordance with the General Partner’s environmental, social,
and governance policy
Management Fee 1.5% per annum of the commitment of each limited partner
Hurdle Rate A hard hurdle rate of 10%
16 Learning Module 1 Alternative Investment Features, Methods, and Structures

Tenderledge Investment Fund VIII, L.P.

Term Sheet
Performance Fee 20% of fund returns in excess of the specified hard hurdle rate
Side Letters If any Side Letter grants more favorable rights to any Partner
than those provided to other Partners, the more favorable rights
will be granted to all other Partners

EXAMPLE 5

Co-Investment Opportunity
Moreton Bay Pension Plan is an investor in Tenderledge LLC Alternatives Fund.
Tenderledge has identified a take-private transaction in Fancy Roofing Co. that
requires a USD1.5 billion capital investment. However, the fund concentration
limit allows Tenderledge to invest only up to USD1 billion in any one investment.
Tenderledge offers the additional USD0.5 billion to Moreton Bay Pension Plan
and other investors in the fund as a co-investment on a reduced fee and no carry
basis. In this case, the co-investment allows Tenderledge the ability to secure
the investment without needing to bring an additional fund manager into the
transaction, and the co-investors gain additional exposure to Fancy Roofing
Company at a reduced management fee and zero performance fees.
EXAMPLE 6

Direct Investment in Renewable Energy

Singapore sovereign wealth fund GIC announced in 2021 that it will directly
invest USD240 million in a Singapore-based energy firm, Arctic Green Energy,
becoming an equity partner in the firm. The investment will help Arctic Green
Energy expand its global operations and increase its capability in geothermal
energy. Geothermal energy is derived from hot underground springs and is a
renewable, economically competitive, and sustainable alternative to using fossil
fuels for heating and cooling. Arctic Green Energy uses geothermal resources to
generate power and produce clean heat. GIC has noted that investing sustainably
is one of its core long-term investment mandates.