This blog post takes the risk management for private equity (PE) funds to an entirely new level. We literally take the cash flow modeling for private capital funds to a new level (i.e., deal level!) as our new model enables a proper and efficient look-through approach for all of your PE investments.
Why would I want to apply a look-trough approach on deal level?
- Do you want your PE risk model to look-through through all the underlying deals?
- Do you want your PE risk model to account for the high default ratios observed for single PE deals?
- Do you want your PE risk model to allow for rapid computation and simulation?
If you answered all the three questions with “YES, THIS SOUNDS REASONABLE,” you definitely should read the rest of this blog post!
What’s in the paper?
In our view, an ideal risk model for PE funds shall operate on underlying deal level to process all available information on the most granular level. On the other hand, fund-level models cannot incorporate most of the deal-level data points by design and, thus, “ignore available information.”
This paper focuses on the relation between exit timing and exit performance.
Therefore, we provide the first joint model for (1) exit timing and (2) exit performance of PE deals that can adequately reflect the dependency between timing and performance. Our model shows that exit timing and exit performance are substantially dependent since the same public market factors govern them.
Our empirical analysis suggests that good macroeconomic conditions result in fast exits with good performance.
By reading our article, you will learn which quantitative methods are especially helpful for modeling PE deal-level data. Moreover, we present you with the probably most advanced deal-level exit simulation method.
Where to find the paper?
The paper we refer to is “Modeling the exit cash flows of private equity fund investments,” written by Christian Tausch, Axel Buchner, and Georg Schlüchtermann.
The article is published in the Journal of Risk.
For a business application of our modeling idea, see this excellent AssetMetrix blog post.
You can download the latest working paper version right now! Also, leave a comment below to tell me about your thoughts on modeling PE cash flows!
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