Alternative Investment Categories

/ 14 May 2018

Alternative Investment Categories

Below is a listing of the various categories of private Alternative Investments which comprise Carofin Offerings:

CategoryDescriptionTargeted Investment Characteristics
Structured Fixed IncomePromissory Notes supported by Collateral having liquidation value projected to exceed the Principal and interest associated with the NotesCurrent income
Venture EquityEquity issuance by young companies which have not generated positive Operating Cash Flow. These companies have significant projected growth and valuable patents and other intellectual property. Industries include life science and information technologies.Very significant capital gains, 40%+ IRR
Private EquityGrowth or restructuring Capital for companies which have Positive Cash Flow, typically in non-tech industry sectors, though with steady projected growth.Strong capital gains, 30%+
Project EquityEquity to finance a specific property. Project construction and subsequent operating risks are the primary risks associated with project finance. Strong current income after construction (12%+) w/ capital gain potential, 25%+ IRR
Real Estate EquityFinance of new properties or refinance of existing properties. Often the purchase of distressed real estate is involved.Strong current income after construction (12%+) w/ capital gain potential, 25%+ IRR
EnergyOil and natural gas development, transmission/transportation or refining. Can be debt or equity financing.Strong current income after construction (12%+) w/ capital gain potential, 25%+ IRR
For more detail regarding either debt or equity Offerings, please read “Private Placements: Debt Investment Overview,” or “Equity Investment Basics.”  

Equity Investment Basics

/ 14 May 2018

Equity Investment Basics

The information below provides a brief overview of Equity Securities. Companies raise capital in the form of either equity or debt. Equity represents an ownership interest in a for-profit company where the Net Equity Value of the company (i.e. total assets less indebtedness) and any ongoing profits are owned proportionately by the holders of the equity.  Equity Securities are a form of permanent Capital for a company.  Debt, on the other hand, represents temporarily borrowed funds by a company and, in return for borrowing capital, the Issuer must meet specific obligations under the terms of the debt for the periodic payment of interest and the scheduled repayment of the borrowed funds (Principal). U.S. companies are incorporated at the state level into C or S Corporations which issue shares or, in the form of a Limited Liability Corporation, which allocates Membership Interests (sometimes also expressed in the form of Units). Equity shares or membership Interests can be in either common or preferred form, whose rights are defined in the company’s Articles of Incorporation, if the company is a C or S Corporation, or in the company’s Operating Agreement, if the company is a Limited Liability Company.  If a company is sold or must be liquidated, debt obligations are Senior in liquidation priority (i.e. repayment) to equity Securities.   If all the debt obligations are not fully satisfied when a company’s assets are sold through liquidation, equity holders will receive nothing. Preferred equity is Senior in liquidation to common equity.  Preferred equity typically will have specific preferred dividend payment obligations, as well as other preferred return on investment-related obligations, which are in “preference” to common equity.  Preferred equity is often the form of equity issued through Private Placement Offerings by Venture-stage companies (i.e. pre-cash flow) or as part of a strategic plan by more mature companies needing expansion capital or acquisition finance. For some background on private debt, please read “Debt Investment Overview.”

Debt Investment Overview

/ 14 May 2018

Debt Investment Overview

The information below provides an overview of debt-related investment, in particular Private Placement Offerings Debt financing is raised by companies through the issuance of Securities called Promissory Notes, Senior Notes, Senior Secured Notes or Subordinated Notes.  These terms indicated the underlying credit structure of a given debt Security and are described below. The amount of debt financing which can be raised by companies through Private Placement offerings ranges in amounts from less than $100,000 to well over $1,000,000,000.  Maturities (i.e. when the Principal is due to be repaid) can be short-term (say 90 days) to over 10 years.  In many cases, Amortizing Principal repayment is established when the debt Security is issued.  Amortization involves the scheduled, partial return of Principal over the life of the debt Security. The repayment schedule of a debt Security should match the projected cash flow to be generated by the Security Issuer’s business during the period the debt Security is outstanding so the company can afford to repay the borrowed Capital when it becomes due.  The debt’s Maturity should also match the Issuer’s intended use of the funds.  For example, funds to be used for short-term working Capital (such as financing Accounts Receivable or Inventory accumulation) should generally involve a Maturity less than one year, whereas funds for Capital Expenditures (including equipment acquisition, property acquisition or facility enhancement, to name a few) will generally involve a Security with a Maturity of greater than one year. Debt Securities are also referred to as Fixed Income Securities because they provide Investors with a specified rate of return through payment of an annualized interest rate that is typically paid by the Issuer monthly or quarterly on the outstanding Principal balance.  Equity Securities, on the other hand, provide Investors with a share of the Issuer’s profits, but after the Issuer’s payment obligations of all debt Securities or loans have first been satisfied. Interest rates may be fixed for the life of the Security, or they may set in relation to a recognized index, such as the U.S. bank Prime Rate or the London Interbank Offered Rate (‘LIBOR’).  The rate paid for such floating rate notes will, therefore, fluctuate as the underlying indexed rate changes due to overall credit market shifts. Lower credit quality Issuers should pay a higher rate of return to Investors than stronger credit quality Issuers.  Longer maturity Securities typically require a higher interest rate than shorter term Securities of a comparable credit Issuer.  The credit strength of a debt Security and the related Investor demand can be enhanced by Collateralizing the Security wherein a Lien on the Issuer’s assets is filed in the state the Issuer and the assets are located.  In the event that the Issuer cannot otherwise meet its redemption obligation, these assets can be Foreclosed upon for sale by Investors to achieve a return of their investment.  Such Securities are referred to as Secured Notes. To generate a greater potential return to the Investor, debt Securities may also incorporate Warrants, a form of purchase option for equity Securities of the Issuer.   Offering Warrants with a debt offering may be necessary to generate Investor demand given the risk profile of the debt Security being offered. Debt Securities can also be issued whose repayment priority is specifically subordinated to other debt Securities of the Issuers.  These are referred to as Subordinated Debt and also as Mezzanine Financing, and their Total Returns provided Investors is typically higher than the Senior Debt Securities of the Issuer which have seniority in the event of a liquidation of the Issuer. Not paying the Principal or interest when due on a debt Security results in a Default event and trigger events that can restrict the Issuer’s operations until the default is “remedied,” potentially forcing the Issuer’s bankruptcy and liquidation.  Consequently, debt should only be offered by companies having a base of operation that generates sufficient cash flow to meet the Principal and interest payments specified by the Security offered. Debt Securities can be structured for continual issuance, sometimes in Tranches, when there is an ongoing need for debt financing by an Issuer, and not all the Capital is required a particular point. Credit ratings on a specific private debt Security, which can be assigned from third parties such as a nationally recognized rating service (i.e. Moody’s Investors Service, Standard and Poor’s Corporation or the NAIC), can significantly increase Investor demand while reducing the interest rate required by Investors.  Credit ratings are only available for the debt Securities of larger, well-established companies. For information about equity investing, please turn to “Equity Investment Basics.”  

Risk vs. Return Considerations for Alternative Investments

/ 14 May 2018

Risk vs. Return Considerations for Alternative Investments

This information summarizes important risk-related considerations for Investors making Alternative Investments. Evaluating a potential investment is, arguably, the most important aspect of any investing activity, whether as part of a private Securities Offering or for a publicly registered investment. No investment is riskless, and losses will inevitably happen within a portfolio. Limiting losses and achieving the projected returns of performing investments is, therefore, critically important. Alternative Investments offer the opportunity for substantially higher returns than comparable publicly registered Securities, but Investors must be committed to a deal-by-deal analysis process that thoroughly evaluates each opportunity, both for its individual merits, as well as its consistency with the Investors’ overall investment goals and risk tolerances. Alternative Investments, because they have virtually no ability for Secondary sales (i.e. sold to another investor), are typically priced at a premium to comparable publicly registered Securities. This offers the opportunity for incremental yield to private Investors, but it severely limits Investors’ ability to actively manage their investment portfolios. A key for individual Investors to consistently achieve a successful portfolio of Alternative Investments is to diversify (no more than 10% exposure to a single transaction) and to subject each investment to comprehensive due diligence. Due Diligence includes an independent testing of all the basic Issuer disclosures and the underlying elements of the business model driving the success of the company being financed. For most investors, the aggregate Alternative Investment allocation should be a minority (say 5% to 10%) of their overall portfolios, with publicly registered investments and other more liquid investments comprising the balance. Alternative Investments should be made with Investors’ discretionary funds — that is, cash resources which Investors can lose without affecting their important personal obligations such as mortgages, college tuition, retirement, etc. There are two general categories of risk accompanying any investment: fundamental risk and market risk: Fundamental risks are those relating to the business being financed, such as the cost of production, customer demand for its products, personnel performance, etc. Market risk pertains to the ongoing volatility of the public financial markets and its impact on the potential liquidity or relative attractiveness of a private Security. For additional information relating to Alternative Investments, turn next to “Why Alternative Investments?”

Why Invest in Alternative Investments?

/ 14 May 2018

Why Invest in Alternative Investments?

The following offers an explanation behind increasing investor allocations into Alternative Investments. The investment returns of many Alternative Investments result from the fundamental performance of the underlying business or project versus the more general swings of the equity and bond (Fixed Income) markets.  Alternative Investments tend to offer Total Returns as well as Non-Correlated Returns based upon Issuer performance and are much less  “market driven” (e.g. prevailing interest rates moving up and down in the bond markets or stock prices changing in the equity markets). As such, many Investors, both institutional and individuals, who are looking to reduce their portfolios’ vulnerability to market movements they can’t control, have increased their allocations to Alternative Investments. Public market volatility has increased Non-fundamental factors have had a dramatic impact on volatility and overall direction of public financial markets, such as: Information “immediacy” via the internet and mobile communication Hedge fund proliferation Algorithm-driven institutional trading High speed trading Global event impacts on domestic public markets Uncorrelated or less-correlated returns Some Alternative Investment strategies offer an uncorrelated (or much less correlated) substitute to major public market indices, whether equity or fixed-income, thereby offering a more immunized investment strategy. Alternatives offer flexibility Current income or capital gains can be prioritized Tax efficiency Transaction structure Risk tolerance matching Industry selection