Assignment Task:

Below is a hypothetical case study, which we would like you to review and use to answer the following questions. Please limit answers to the two questions to no more than two pages in total. 

1) Please discuss the strengths and weaknesses of the firm and investment team and assess whether they are a good firm and investment team overall.
2) Please summarize the Fund’s strategy and why it is or is not attractive.

Firm Details:

Firm: The XYZ Group is one of the world’s largest and most diversified multi-product global alternative asset management firms. We advise an array of specialized investment funds and other investment vehicles that invest across a range of industries, geographies, asset classes and investment strategies and seek to deliver attractive returns. Since our firm was founded in 1981, we have grown to become a leading global alternative asset manager with approximately $195 billion in assets under management (“AUM”) across 113 funds and 120 funds of funds vehicles as of December 31, 2017. We have over 1,500 employees, including nearly 600 investment professionals, in 30 offices across five continents, and we serve over 1,800 fund investors from 77 countries. 

Since the Firm’s formation in 1981, XYZ has been led by its three founding partners, Founder 1, Founder 2, and Founder 3 (“Founders”). As the firm has grown, the Founders have worked to institutionalize the firm and provide investors with innovative investment solutions. As part of the firm’s evolution, there have been some material changes in XYZ’s ownership structure, the most notable of which occurred in January 2011 when XYZ completed an initial public offering (“IPO”) of its common units. As of December 31, 2016, public investors indirectly owned approximately 32% of the equity in the Public Partnership; XYZ’s three Co-Founders and other senior XYZ professionals and other professionals continue to own a majority of the firm. 

XYZ began making Opportunistic real estate investments in 1991. The team has been responsible for investing five US-based Opportunistic real estate investment funds and five credit funds. Since the inception of Fund I in 1991, XYZ Realty has invested approximately $12.1 billion of equity in real estate assets with a total capitalization of approximately $41 billion.

Fund VI is the sixth such XYZ-sponsored fund focused on Opportunistic real estate investments in the US. In addition to the Firm’s six Opportunistic funds, XYZ Realty also manages a Core real estate fund and managed five real estate credit funds in the US. The Firm also has real estate businesses in Europe and Asia with separate teams on the ground which oversee and manage the investment of those funds. 

XYZ Realty does not believe that any of these funds directly compete with XYZ’s US-based Opportunistic real estate funds; however, to the extent investment opportunities overlap, they will be allocated in accordance with the established Allocation of Investment Opportunities process.

Investment Team: 

XYZ Realty consists of approximately 100 real estate investment professionals with extensive, complementary experience and skills relating to real estate and property markets. XYZ Realty uses a team approach to identify, complete, manage and sell its assets through their life cycle. The group is divided into three basic areas: Sourcing, Transactions, and Asset Management. XYZ considers its investment team to be appropriately suited for successfully investing and managing Fund VI. As the number of assets under XYZ Realty’s ownership at a given time has increased, XYZ has increased its team size accordingly to implement its style of active asset management. Depending upon the acquisition and/or disposition pace of the investments, XYZ may consider increasing the number of professionals in the group over time.

The following table details the senior investment professionals, defined as Managing Directors, in each group along with their location, firm tenure, and total experience. 

XYZ Realty has had two senior-level departures in the past five years. These departures allowed for other capable members of the team at the Principal and Vice President Level to take on greater responsibility and leadership. 

Compensation:

XYZ believes quality compensation and incentive programs are critical to hiring and retaining highly qualified individuals. XYZ maintains incentive programs that are designed to properly motivate and retain its investment personnel.

Incentive bonuses are discretionary and, other than for managing directors and principals, are expected to range from 0% to 200% of base compensation based upon individual and fund performance. This performance will largely be determined based on the success of the fund’s investments. All investment professionals are salaried. 
In addition, XYZ has implemented an Equity Incentive Plan. Most XYZ employees, including the Managing Directors and below on the XYZ investment team, received a Deferred Restricted Common Unit (“DRU”) award at the time of XYZ’s IPO in January 2011. Employees may also be eligible for future awards under the Equity Incentive Plan. 

The key aspect of compensation across funds at XYZ is participation in a fund’s carried interest. XYZ designs its compensation arrangement so that its investment personnel are able to generate the greatest amount of personal gain through carried interest. It is expected that the Fund VIII’s carried interest will be allocated approximately 40% to the investment professionals and approximately 60% to XYZ. Of the 40% to be allocated to the fund’s deal team, a large portion consists of a fixed allocation and a smaller portion is allocated on a discretionary deal-by-deal basis. Managing Directors of the respective team are allocated a significant portion of the carried interest, although members of the deal team down to the Senior Associate level participate. The carried interest allocated to investment professionals is subject to time-based vesting.

Team Investment:

XYZ will commit at least 4% of Capital Commitments to the Partnership and the Parallel Funds, not to exceed $100 million (subject to increase by XYZ in certain circumstances). XYZ Realty has historically enjoyed high commitment rates from eligible XYZ professionals, and XYZ expects that to be the case for Fund VIII. XYZ, its partners and other professionals have historically maintained a strong alignment of interest with their limited partner investors. 

XYZ does not provide a lending vehicle to Managing Directors for their capital commitment, though it refers to Managing Directors to certain banks to allow the Managing Directors to borrow amounts to fund capital commitments. For junior professionals, XYZ has established a loan program through Wells Fargo Bank for professionals who choose to co-invest in XYZ funds. Under this program, XYZ guarantees a portion of the co-investment funding obligation of junior professionals for as long as they remain at the Firm.

Fund Details:

Fund VI is seeking total commitments in the range of $4 billion to $5 billion. In 2014 and 2015, XYZ Realty deployed between $1.0-1.5 billion of equity per year and we believe a fund size in this range is justified by our current investment pace over a four- to five-year investment period. 

XYZ Realty believes it is distinctly suited to employ an asset-specific, market-focused approach. Its senior team has continually been active in its target markets since 1996; it has not diverted its focus to other geographies (outside the U.S.) or other formats for investing in real estate (e.g. companies or portfolios). XYZ Realty continues to uncover compelling opportunities in US real estate through the consistent application of our research-driven, value-based investment philosophy that has helped enable us to successfully invest over $12.1 billion of equity in 527 separate investments. Based on the opportunities that we anticipate, we believe a fund size of $4 billion to $5 billion will provide the capital necessary to apply our investment strategies and help meet target return objectives. 


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  • Posted on : January 24th, 2019

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