Risk Management for Private Equity Funds

48 Pages Posted: 16 Jan 2015

See all articles by Axel Buchner

Axel Buchner

University of Passau; CEPRES - Center of Private Equity Research

Multiple version iconThere are 2 versions of this paper

Date Written: September 18, 2014


Although risk management has been a well-ploughed field in financial modeling for over three decades, the understanding how to correctly quantify and manage the risks of investing in private equity remains limited and continues to considerably lag that of other traditional asset classes. The objective of this paper is to fill this gap by developing the first comprehensive risk management framework for private equity fund investments. The framework captures the three main sources of risks that private equity investors face when investing in the asset class: market risk, liquidity risk, and cash flow risk. Underlying the framework is a stochastic model for the value and cash flow dynamics of private equity funds, which allows deriving three dynamic risk measures for private equity fund investments: Value-at-Risk (VaR), Liquidity-Adjusted Value-at-Risk (LVaR), and Cash-Flow-at-Risk (CFaR). The model is calibrated to historical data of buyout funds and the dynamics of the developed risk measures are illustrated using Monte-Carlo simulations. A sensitivity analysis shows the impact of changes in the main model parameters on risk measures.

Keywords: Private equity, risk management, Value-at-Risk, Cash-Flow-at-Risk, Liquidity-Adjusted Value-at-Risk

JEL Classification: G17, G23, G24

Suggested Citation

Buchner, Axel, Risk Management for Private Equity Funds (September 18, 2014). Available at SSRN: https://ssrn.com/abstract=2549664 or http://dx.doi.org/10.2139/ssrn.2549664

Axel Buchner (Contact Author)

University of Passau ( email )

Innstra├če 27
Passau, 94030

CEPRES - Center of Private Equity Research ( email )

Max-Joseph-Strasse 7
Munich, 80333

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