Academic Finds Way to Quantify GP Risk

"Fresh research has discovered a way for GPs to quantify their firm-wide risk profile, something that some investors are taking a greater look at," writes Thomas Duffel. He speaks with Vitaly Nechaev of DataArt to comment on these findings.

“A risk profile analysis of funds is an essential process for every private equity firm,” echoes in agreement Vitaly Nechaev, vice president of private equity software developer DataArt.

But assigning a risk score to a GP as a whole has historically been difficult to do, mostly on account of shortcomings of other risk assessment methodologies, he adds. For example finding the standard deviation or variance of returns based on changes of a portfolio company’s Net Asset Value has a “stale pricing problem”. This is caused because the illiquid nature of the asset class means that it is difficult to work out the volatility of underlying portfolio companies, and so difficult to work out the volatility of the fund as a whole."

The article goes on to explain the profit distributions method for a more effective risk profile analysis of the firm t by academic Oliver Gottschalg of HEC Business School.

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