A Revolution in Private Equity Risk Management
Bespoke VaR calculations for your portfolio
eFront VaR is a new product that has been designed in partnership with Peracs specifically for private equity fund investors and eFront clients.
By using eFront VaR, limited partners are able to identify the likely movements of their private equity portfolio in terms of Net Asset Value and cash over a 12-month period.
This in turn enables limited partners to make specific Value-at-Risk (VaR) calculations based on the particular characteristics of their underlying portfolio.
In the past, risk measurement methodology for private equity funds has relied upon relatively unfavorable standardized models to calculate VaR, or by borrowing measurement techniques designed for other asset-classes that struggle to accommodate private equity’s specific characteristics, such as its illiquidity and governance attributes.
For the first time, private equity limited partners are now able to feed their own data in to a ready-made simulation to provide meaningful probability distributions for a portfolio’s NAV evolution and cash positions over time.
Powerful bottom-up methodology
The recent increase in the use of VaR as a risk measure in private equity is both driven by market and, importantly, regulatory requirements for certain types of investing institutions.
To accommodate this need, institutions have turned to ‘top-down’ approaches to calculate VaR. The two main approaches are: using databases with historic PR CFs; and using indices of listed private equity stock.
Both provide limited insights into risk-return relationships and are unsuitable to assess or compare the riskiness of different fund managers and strategies. The listed private equity approach tends to overstate volatility and the available indices are thin and not sufficiently representative of unlisted private equity funds. Meanwhile, fund databases suffer from auto correlation, an aggregated treatment of vintage years, and have no specific treatment for industry segments or deal sizes. The data also tends to be rather old.
By contrast, eFront VaR combines a powerful bottom-up methodology with unique and granular data, resulting in a meaningful and sophisticated insight into potential portfolio scenarios.
Gaining a more sophisticated view of risk is the holy grail of private Equity fund teams. The peculiarities of LP investing means that generic risk solutions are of limited value. eFront VaR is an indispensible tool, allowing us to plug in our own unique portfolio information and providing scenarios that can inform strategy, not just compliance and reporting.Head of PE Funds Top 50 European LP
Bottom-up methodologyeFront VaR is the first ever product to simulate NAV and cash flow scenarios using a proprietary bottom-up value-at-risk model for single deals and funds.
VaR, specifically for private equityeFront VaR adopts approach widely used by regulators and investment institutions, refined for private equity.
Scenarios for your portfolioScenarios for your portfolioeFront VaR allows LPs to feed in their underlying portfolio data, including specific fields such as deal type, sector, age and performance to-date, resulting in realistic scenarios and distribution ranges.
It also provides insight into the probable movement of your portfolio in terms of NAV and cash flow over a 12 month period.
A quantum leap in risk management
For the first time ever, limited partners have access to an off-the-shelf product that accommodates not just the specific nature of il-liquid private equity interests, but also takes into account their specific underlying exposures.
As a result, eFront VaR dramatically enhances the accuracy of estimates for specific portfolios.
This in turn makes regular risk monitoring achievable, based upon periodically updated portfolio characteristics.
In addition, limited partners can use this tailored scenario analysis to inform investment strategy and portfolio design decisions, such as the impact of making new commitments, secondary transactions and so on.
Limited partner fund investment teams can also use the scenario results to demonstrate skills at building balanced portfolios with better than average risk attributes.
AS A VALUE CREATOR
eFront VaR will provide the rich, actionable information to turn risk measurement into a value-enhancing strategy