Mastering Illiquidity

Risk management for portfolios of limited partnership funds
Standards Information Network (Verlag)
  • erschienen am 18. April 2013
  • |
  • 304 Seiten
E-Book | PDF mit Adobe DRM | Systemvoraussetzungen
978-1-119-95280-0 (ISBN)
Arms investors with powerful new tools for measuring andmanaging the risks associated with the various illiquid assetclasses
With risk-free interest rates and risk premiums at record lows,many investors are turning to illiquid assets, such as real estate,private equity, infrastructure and timber, in search of superiorreturns and greater portfolio diversity. But as many analysts,investors and wealth managers are discovering, such investmentsbring with them a unique set of risks that cannot be measured bystandard asset allocation models. Written by a dream team ofglobally renowned experts in the field, this book provides a clear,accessible overview of illiquid fund investments, focusing on whatthe main risks of these asset classes are and how to measure thoserisks in today's regulatory environment.
* Provides solutions for institutional investors in need ofguidance in today's regulatory environment
* Offers detailed descriptions of risk measurement in illiquidasset classes, illustrated with real life case studies
* Helps you to develop reliable risk management tools whilecomplying with the regulations designed to contain the individualand systemic risks arising from illiquid investments
* Features real-life case studies that capture an array of riskmanagement scenarios you are likely to encounter
weitere Ausgaben werden ermittelt
Dr PETER CORNELIUS is heading AlpInvest Partners'economic and strategic research. Prior to his current position, hewas the Group Chief Economist of Royal Dutch Shell, chief economistand Director of the World Economic Forum's GlobalCompetitiveness Program, Head of International Economic Research ofDeutsche Bank, a senior economist with the International MonetaryFund, and a staff economist of the German Council of EconomicAdvisors. He is the chairman of EVCA's 'RiskMeasurement Guidelines' working group. He has been an adjunctprofessor at Brandeis University and a Visiting Scholar at HarvardUniversity and has published widely in leading academic and tradejournals and (co)authored several books, including InternationalInvestments in Private Equity (Elsevier/Academic Press).
Dr CHRISTIAN DILLER is co-founder of Montana CapitalPartners, focused on secondary liquidity in private equity throughits own innovative investment product, sophisticatedsecuritizations and risk management services for institutionalinvestors. Previously, he was Head of Solutions at Capital Dynamicsleading the structuring and portfolio and risk managementactivities. Christian advised some of the world's largestinvestors on portfolio rebalancing and structuring, cash flowplanning and risk management in private equity. Prior to that, heworked for Allianz Group and Pioneer Investments. Christian is amember of the EVCA's 'Risk MeasurementGuidelines' working group, co-chairman of the'Technical Working Group on Solvency II & IORP' andlecturer at the CIPEI course held by the Oxford Said BusinessSchool. He is author of several articles for practitioners andacademics and holds a Dr. rer. pol. in finance specializing onrisk-/return characteristics of private equity funds.
Dr DIDIER GUENNOC is co-founder of LDS Partners,specialised in decision systems, program structuring, corporategovernance and risk management solutions for institutionalinvestors in private equity. He also acts as the secretary of theInternational Private Equity and Venture Capital Valuation Board(IPEV Board). Previously he worked for Origo Management and advisedEVCA, the European Private Equity and Venture Capital Associationon public affairs, statistics and professional standards. Hestarted his career at Xerfi, the leading French market researchcompany. Didier was a member of the advisory board of the Centrefor Entrepreneurial and Financial Studies (TechnischeUniversität München - Germany) and of the privateequity subcommittee of the Chartered Alternative InvestmentAnalyst® Program. Didier holds a PhD in BusinessAdministration from the University Robert Schuman, Strasbourg(France).
Dr THOMAS MEYER is co-founder of LDS Partners,specialised in decision systems, program structuring, corporategovernance and risk management solutions for institutionalinvestors in private equity. Previously he was with EVCA, theEuropean Investment Fund and Allianz Asia Pacific. He is a memberof the EVCA's 'Risk Measurement Guidelines'working group and of the Chartered Alternative Investment AnalystAssociation's (CAIA) private equity sub-committee and aShimomura Fellow of the Development Bank of Japan's ResearchInstitute of Capital Formation. Thomas is co-directing theCertificate in Institutional Private Equity Investing (CIPEI)course held by the Oxford Said Business School's PrivateEquity Institute and co-authored several books including Beyondthe J-Curve and J-Curve Exposure.
Foreword xi

Acknowledgements xiv

1 Introduction 1

1.1 Alternative investing and the need to upgrade risk management systems 1

1.2 Scope of the book 4

1.3 Organization of the book 6


2 Illiquid Assets, Market Size and the Investor Base 17

2.1 Defining illiquid assets 17

2.2 Market size 20

2.3 The investor base 23

2.4 Conclusions 32

3 Prudent Investing and Alternative Assets 33

3.1 Historical background 34

3.2 Prudent investor rule 36

3.3 The OECD guidelines on pension fund asset management 38

3.4 Prudence and uncertainty 38

3.5 Conclusion 41

4 Investing in Illiquid Assets through Limited Partnership Funds 43

4.1 Limited partnership funds 43

4.2 Limited partnerships as structures to address uncertainty and ensure control 47

4.3 The limited partnership fund's illiquidity 49

4.4 Criticisms of the limited partnership structure 52

4.5 Competing approaches to investing in private equity and real assets 52

4.6 A time-proven structure 55

4.7 Conclusion 57

5 Returns, Risk Premiums and Risk Factor Allocation 59

5.1 Returns and risk in private equity 59

5.2 Conclusions 73

6 The Secondary Market 75

6.1 The structure of the secondary market 76

6.2 Market size 83

6.3 Price formation and returns 87

6.4 Conclusions 93


7 Illiquid Assets and Risk 97

7.1 Risk, uncertainty and their relationship with returns 98

7.2 Risk management, due diligence and monitoring 102

7.3 Conclusions 105

8 Limited Partnership Fund Exposure to Financial Risks 107

8.1 Exposure and risk components 108

8.2 Funding test 113

8.3 Cross-border transactions and foreign exchange risk 117

8.4 Conclusions 121

9 Value-at-Risk 123

9.1 Definition 123

9.2 Value-at-risk based on NAV time series 124

9.3 Cash flow volatility-based value-at-risk 129

9.4 Diversification 136

9.5 Factoring in opportunity costs 141

9.6 Cash-flow-at-risk 143

9.7 Conclusions 144

10 The Impact of Undrawn Commitments 149

10.1 Do overcommitments represent leverage? 150

10.2 How should undrawn commitments be valued? 151

10.3 A possible way forward 153

10.4 Conclusions 159

11 Cash Flow Modelling 161

11.1 Projections and forecasts 162

11.2 What is a model? 163

11.3 Non-probabilistic models 167

11.4 Probabilistic models 171

11.5 Scenarios 178

11.6 Blending of projections generated by various models 179

11.7 Stress testing 180

11.8 Back-testing 184

11.9 Conclusions 187

12 DistributionWaterfall 189

12.1 Importance as incentive 190

12.2 Fund hurdles 191

12.3 Basic waterfall structure 193

12.4 Examples for carried interest calculation 195

12.5 Conclusions 202

13 Modelling Qualitative Data 207

13.1 Quantitative vs. qualitative approaches 207

13.2 Fund rating/grading 208

13.3 Approaches to fund ratings 211

13.4 Use of rating/grading as input for models 216

13.5 Assessing the degree of similarity with comparable funds 218

13.6 Conclusions 220

14 Translating Fund Grades into Quantification 221

14.1 Expected performance grades 221

14.2 Linking grades with quantifications 225

14.3 Operational status grades 228

14.4 Conclusions 229


15 Securitization 233

15.1 Definition of securitization 233

15.2 Financial structure 237

15.3 Risk modelling and rating of senior notes 239

15.4 Transformation of non-tradable risk factors into tradable financial securities 244

15.5 Conclusions 248

16 Role of the Risk Manager 249

16.1 Setting the risk management agenda 249

16.2 Risk management as part of a firm's corporate governance 251

16.3 Built-in tensions 253

16.4 Conclusions 255

17 Risk Management Policy 257

17.1 Rules or principles? 258

17.2 Risk management policy context 258

17.3 Developing a risk management policy 262

17.4 Conclusions 264

References 267

Abbreviations 277

Index 279

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