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Risk in Private Equity

Author: Dr. Christian Diller, Dr. Christoph Jäckel, Montana Capital Partners
Date: October 2015

The BVCA, in association with Montana Capital Partners has published a report into Risk in Private Equity, which attempts to explore and analyse the different types of risk that can affect PE investments.

Due to the specific characteristics of private equity investments, the standard risk management tools that are used in other asset classes are unlikely to be applicable. Instead, there are specific risks in private equity that an institutional investor should be aware of. In this study, we assess and measure the most significant risks in private equity, and examine in detail how these risks can be reduced. We contend that the most significant risks in the asset class are those of market risk, funding risk, liquidity and capital risk, and our empirical analysis of three different private equity datasets finds that both funding and capital risk can be substantially reduced through diversification. In the study, we also measure “Realisation Risk”, an analysis on losing value from the point of observation until the end of fund’s life, for the first time in a study on risk analysis in private equity. Our results demonstrate that the risk for an investor of losing any capital over the entire holding period with a portfolio of 20 funds is only 1.4%, reducing to under 1% for an investor with a portfolio of 50 funds, adjusting for capital calls and distributions.

These results demonstrate that private equity is not as risky as it is often perceived by some market participants, and that risk in the asset class should be conceptualised in a different way than it currently is.

Geography: All

Type of study: Association

Relevant for: LPs, GPs, Fund of funds, Associate

Source: BVCA Research Paper – October 2015