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Alternative Investments Angus Cartwright, Jr Case Analysis

Alternative Investments Angus Cartwright, Jr Case Analysis

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Published by: sharanya86 on Oct 02, 2009
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06/12/2013

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Alternative InvestmentsAngus Cartwright, JrCase Analysis
  J Srinivasan2008PGP091BIntroduction:
 
Mr. Angus Cartwright, a financial planner, needs to makerecommendations for his two long-time family clients, theDeRights. John and Judy DeRight are coming to Cartwright atdifferent stages in their life and both are interested indiversifying their investment portfolio to include investments inreal estate. Cartwright has four properties he believes to beperfect for his clients however he needs to narrow them downto just one property to each client. John DeRight, currently in retirement, will have $9 million fromthe sale of stock to invest in a property. He is comfortable withhis retirement savings, but would like to diversify his retirementfunds in real estate. He requires a 12% return. Judy DeRighthas $16 million available to invest. She is at the peak of hercareer and is likely interested in longer-term possibilitiescompared to John. She also requires a 12% return on herinvestment.
Investor’s Profile:
 John DeRight is a retiree and has all of his wealth in securities;primarily in common stock of a company that bought hisstartup company. John currently has $6 million in stocks.Dividends from these stocks provide John his main source of income. Not diversifying but having all his net-worth in onebasket can be very risky and especially in common stocks. Johnwants to diversify his portfolio by taking approximately $3million out of securities to invest in real estate. Again, John is aretiree looking to balance his portfolio by including real estateinvestments. His investing profile can be stated as low riskinvestor looking for periodic income payments (steady incomestream) in which John can use for daily living expenses. Judy DeRight is a much younger investor. She owns andoperates her own company as President. The companyperforms well with annual income of $800,000 before taxes and$500,000 after taxes. Judy was able to accumulated $3.5million and also wants to diversify her investments to includereal estate. Judy presumably is in a high-income bracket and
 
does not necessarily need immediate cash-flows from herinvestments. Her investing profile can be characterized ashigher-risk, higher return, no immediate income frominvestment is necessary, high potential gains in later years(targeting appreciation), and currently would like investmentswith tax shelter capabilities due to current high ordinaryincome from other sources.
Real Estate Industry:
Ininvestment finance, private equity real estate is anasset  classconsisting of equity and debt investments in property.Investments typically involve an active management strategyranging from moderate reposition or releasing of properties todevelopment or extensive redevelopment.Investments are typically made via private equity real estatefund, acollective investment scheme, which pools capital frominvestors. These funds typically have ten year life spanconsisting of a 2-3 year investment period during whichproperties are acquired and a holding period during whichactive asset management will be carried out and the propertieswill be sold.Private equity real estate funds generally follow core-plus,value added, or opportunistic strategies when makinginvestments.
Core Plus:
This is a moderate risk/moderate return strategy. The fund will generally invest in core properties however someof these properties will require some form of enhancement orvalue-added element.
Value Added:
This is a medium-to-high risk/medium-to-highreturn strategy. It will involve buying a property, improving it insome way, and selling it at an opportune time for a gain.Properties are considered value added when they exhibitmanagement or operational problems, require physicalimprovement, and/or suffer from capital constraints.

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