The same “two-part modelling” idea is applied to an extended dataset to develop a tailored deal-level risk model that can provide 95%, 99%, and 99.5% Value at Risk figures for one- and three-year horizons. The AssetMetrix analytics team incorporates the main insights from the paper in their established risk module. Consequently, once again, the uniqueness of the private capital asset class calls for a bespoke model to ensure realistic risk results. As a potential simpler alternative, traditional return distributions like the normal or lognormal distribution cannot reflect the zero-heavy nature of private capital deal multiples and thus are not suitable for risk management on deal level.
We apply a so-called “two-part model” to split the MOIC distribution in a Probability of Default (PD) part and a parametric part for the positive exit multiples to account for these high default ratios. Concretely, more than 22% of VC deals in our dataset result in a total default, which corresponds to an exit multiple of exactly zero. Finally, a Monte Carlo simulation example analyzes risk management applications, emphasizing the deal-level diversification effects within a single fund.įigure 1 displays the empirical cumulative distribution function (ECDF) of the multiple on invested capital (MOIC) in the Venture Capital (VC) dataset to exemplify the high risk on deal level in the private capital universe. A proprietary dataset provided by AssetMetrix is used for empirical estimation of the model parameters. The novel modeling approach jointly describes portfolio companies’ exit timing and exit performance. The new paper develops a deal-level model for the exit cash flows of private equity funds.
His research focuses on stochastic methods in finance, engineering, and information systems.
Georg Schlüchtermann is a Professor of Mathematics at the University of Applied Sciences in Munich, and he also teaches at the LMU in Munich. Axel Buchner is a Professor of Finance at the ESCP Business School in Berlin, and he has published numerous articles on advanced private equity models.
#Risk engine for equities full
He helped to develop the full AssetMetrix analytical model suite (including Forecasting, Risk, Benchmarking, Stress Testing, and Program Planning). Christian Tausch is a quantitative researcher and developer at AssetMetrix GmbH. The academic paper, published in the peer-reviewed Journal of Risk, was written by Tausch, Buchner, and Schlüchtermann.
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