The Challenge of Using Standard Risk Management in Private Equity

Abstract

As private equity is increasingly becoming part of the traditional investment world for institutional investors, banks, and high net worth individuals, its risk needs to be understood and managed like for any other asset class. Unfortunately, applying standard risk management techniques in private equity is impossible and modifying them to work in private equity is challenging. We argue that the most challenging aspects of risk management in private equity probably are: asset allocation, determining the top-performers, and actual risk management using financial models.

Keywords: risk management, private equity, venture capital, buyout, modeling, asset allocation, alternative investment, alternative asset

JEL Classification: G1