Mbalenhle Calixto is a global institutional portfolio manager who prepares for an annual meeting with the investment committee (IC) of the Estevão University Endowment. The endowment has €450 million in assets, and the current asset allocation is 42% equities, 22% fixed income, 19% private equity, and 17% hedge funds.
The IC’s primary investment objective is to maximize returns subject to a given level of volatility. A secondary objective is to avoid a permanent loss of capital, and the IC has indicated to Calixto its concern about left-tail risk. Calixto considers two asset allocation approaches for the endowment: mean–variance optimization (MVO) and mean–CVaR (conditional value at risk) optimization.
Calixto reviews the endowment’s future liquidity requirements and analyzes one of its holdings in a private distressed debt fund. He notes the following about the fund:
- As of the most recent year end:
- The NAV of the endowment’s investment in the fund was €25,000,000.
- All capital had been called.
- At the end of the current year, Calixto expects a distribution of 18% to be paid.
- Calixto estimates an expected growth rate of 11% for the fund.
Q. Calculate the expected NAV of the fund at the end of the current year.
Ans . Should be
(250 L *1.11)*(1-.18)
But the Answer Given in candidate resourse is
The expected NAV of the fund at the end of the current year is €25,258,050, calculated as follows:
First, the expected distribution at the end of the current year is calculated asExpected distribution = [Prior-year NAV × (1 + Growth rate)] × (Distribution rate).Expected distribution = [(€25,000,000 × 1.11) × 18%] = €4,995,000.
Therefore, the expected NAV of the fund at the end of the current year isExpected NAV = [Prior-year NAV × (1 + Growth rate) + Capital contributions – Distributions)] × (1 + Growth rate).Expected NAV = [(€25,000,000 × 1.11) + 0 − €4,995,000] × 1.11 = €25,258,050.
Why Growth is taken twice?
Say, the current year is 2021.
By the following language: “As of the most recent year end: The NAV of the endowment’s investment in the fund was €25,000,000” the question means that at the end of year 2020 (NOT 2021), the NAV was 25,000,000.
We are required to find the expected NAV of year 2022. So, we multiply 2020’s ending NAV or 2021’s opening NAV with the growth rate. This is 2021’s ending NAV before distribution and additions. Then deduct distributions and add capital contributions. Now, this is the beginning NAV for the year 2022. Finally, we multiply this NAV figure with the growth rate to get the ending NAV of 2022.