Thursday, 16 August 2018

Private Equity and Forecasting: From "It's Complicated" to Why Would I?"

A new article by Didier Guennoc can be found on LinkedIn

Monday, 16 April 2018

The behaviour of buyout funds when confronted to an adverse economic environment

The full article can be read here


Funds with vintages 2005-2007 have weathered one of the worst financial storms in financial history. Ten years later we have sufficient data to analyse the behaviour of European buyout funds that went through these difficult times. The objective of this paper is to measure how funds that deployed their capital in an environment characterised by a supportive economic growth, low interest rates (it was the feeling at that time), high leverage and ever increasing asset prices, reacted to the economic storm that was unleashed in the fall of 2008.

While the group of selected funds as a group confirm intuitive results, the underlying patterns show a very different story.It is imperative that decisions are made on the basis of solid analyses.

The transition matrices resulting from these analyses are of prime importance for the models used by LDS Partners. Projections of expected future returns, of liquidity profiles and the stress testing of portfolios of funds have a much higher likelihood of mirroring the future reality.

Wednesday, 11 October 2017

2017 Risk Management Symposium - 29&30 November

After the success of the three previous Risk Management Symposia, LDS Partners, Luxembourg, and the Private Equity Institute, Saïd Business School, Oxford, have partnered again for the 2017 Symposium.

The symposium programme is finalised. Participating firms this year - registered until 3 November 17:

  • 17Capital
  • Al Muhaidib
  • Alyafi Group
  • APG Asset Management
  • Ardian
  • Augentius
  • BaltCap
  • Capital Dynamics
  • CDC Group
  • Cerulli Associates Europe Ltd.
  • Citigroup
  • Coller Capital
  • DB Private Equity
  • EBRD
  • EQT
  • ETF Partners
  • European Investment Fund
  • Ffs
  • Finnish Industry Investment
  • Hermes GPE
  • Infospectrum Ltd.
  • Inter Fund Management
  • Invest Europe
  • JP Morgan
  • Lappeenranta University of Technology
  • LDS Partners
  • Max Planck Institute for Human Development
  • Mercer
  • Paribus Capital GmbH
  • The Abraaj Group
  • UBS Asset Management
  • Unigestion SA
  • Validus Risk Management
  • Vision Capital
  • Waterland Private Equity Investments

You can register here.

Monday, 15 May 2017

Secondary Sale of a Portfolio of Interests in Closed Ended Funds

LDS Partners provides a secondary pricing service, which for obvious reasons has specific data needs. The surge in the use of virtual data rooms has certainly increased the information readily at the disposal of the parties. Drooms publised a post by Didier Guennoc on this specific topic.

Read more about it here.

Wednesday, 15 February 2017

3rd Party AIFMs and substance - risk management for UCITS and AIFs, not quite the same

3rd party UCITS managers deciding to expand their services and act as well as 3rd party AIFM are confronted to the challenge of conducting a robust risk management function.

As the scope of eligible financial instruments in the UCITS regulation has evolved over time, the 3rd party UCITS managers have had to cope for a while now with assets that are not quoted on an active market. However, the restrictions put on such eligible assets regarding their share in the portfolio of any UCITS, their valuation in terms of independence of the valuation process, their accuracy and timeliness have made possible to run relatively low cost and traditional approaches such as the historical method (using past observed prices or valuations to deduct a Value-at-Risk) or the parametric method (assuming a normal distribution of the valuations/prices with an observed variance/covariance matrix). The use of a tracker duplicating more or less the behaviour of the non-listed financial instruments can even be considered.

However, it turns out that when becoming 3rd party AIFM, players are confronted with non-listed assets whose characteristics, valuation processes and frequency of reporting direct a robust risk management function towards more sophisticated modelling with the use notably of the Monte Carlo method.

When 3rd party AIFMs embark on this journey, they usually rely on traffic light indicators built on qualitative questions regarding the exposure to market risk, credit risk, liquidity risk, counterparty risk and operational risk. The question is then how to move from this starting point to the production of more powerful risk indicators such as Value-at-Risk, cash flow projections and expected returns to both provide substance and help their clients in marketing and normalizing their products in the portfolio of investors.

Through its long experience in risk management for closed ended funds consisting of illiquid assets such as positions in unlisted companies or real assets, LDSP is at the forefront and assists 3rd party AIFMs in making the difference for their clients.

Wednesday, 01 February 2017

Example report risk parameters for fund investments

LDS Partners' example report of risk parameters for fund investments: download here

Thursday, 19 January 2017

Currency Hedging - A quantified example

Forex volatility and the ability to implement successful currency hedging currency strategies for private equity portfolios - a quantified example

A case study quantifying different strategies that could have been followed for a buyout fund vintage 2005 denominated in GBP with regard to the GBP/USD currency fluctuations impact: read article here

Friday, 09 December 2016

Risk Management for Private Equity: Turn a regulatory burden into a competitive edge

The first rounds of reporting under the Alternative Investment Fund Managers Directive (AIFMD - 2011/61/EU) to the regulator have now been done. A hassle and an additional expense for most, but adding value for those that look at this cleverly.

Yes, it is an additional burden and cost for the managers and the funds. The regulators appreciate the oversight and seem at ease with the asset class. LPs also are starting to use this data and integrate it into their risk management programs, to the benefit of an increased exposure to the asset class.

But more importantly, an increasing number of managers have found added value by using the risk return profiling beyond the regulator's obligations and as such making a difference.

For clarity reasons, a risk return profile is the probability distribution of final expected returns and the expected liquidity of a fund.

Some of the requests we get from the GP clients using our services:

    • My portfolio is not mature, and I'm fundraising. I want to give robust indications of the ultimate expected return
    • I want to assess the impact of a new investment on my current risk return profile, i.e. on my return expectations and particularly my liquidity profile
    • Liquidity events are happening later than expected, how can I reassure my investors?


These instances are exactly when the usability of the risk return profiling proves itself. A simple, straightforward but robust analysis that is credible and well perceived by the LPs. It is about using the same "language", the same metrics, as the LPs.

GPs can either do the risk management in-house or, externalise the analyses and reporting, while still maintaining the ultimate responsibility. The in-house risk management function, if well done, can prove to be challenging and expensive, especially since often there are only punctual needs. In GP structures, the bulk of the activity should rightfully be directed towards investment opportunities and investment management. This is ultimately what the LPs are paying for.

Outsourcing the analytical work without delegation of responsibility is an efficient way forward:

    • It keeps the risk management responsibility in-house.
    • It provides the decision tools, reports and analyses in a recurrent manner.
    • It is confidential.
    • The risk return and the liquidity profiling are done on the fund level and on individual investment level.
    • The impact on fund return expectations when adding a new investment is addressed whenever the need arises.


LDS Partners has put in place a fully-fledged service that provides the GP with the necessary reports and analyses to be able to support the risk management function, assuring that the tools and methodologies are up to standard for the noticed increasing scrutiny of the regulator. The responsibility remains with the GP but he/she disposes of all necessary input to be able to assume the risk management function while having access to specialists' know-how and up to date regulatory requirements.

For any question or comment please contact us at LDS Partners

Wednesday, 07 December 2016

Risk Management AIFMD - Annex 4

A template report for annex 4 AIFMD reporting can be downloaded here

Monday, 05 December 2016

3rd Party AIFMs: Why they are right to bother with Risk Management

The market for 3rd party AIFM services is taking shape across the European Union. The business model of 3r Party AIFMs authorized under the Alternative Investment Fund Managers Directive (AIFMD - 2011/61/EU) is to offer to their clients a turnkey solution – or platform - to operate their funds in the European Union (to be more precise in the European Economic Area or EEA). The supplier offers to the client a regulated entity able to perform the portfolio management and/or risk management functions for his/her fund (the Alternative Investment Fund or AIF) accepted on the platform - meaning that the fund can then be marketed across the EEA.

This can represent the best route to the market for entities located outside the EEA (such as the US and potentially the UK depending on the outcome of the Brexit) but also for initiators of projects who want to test their concept before establishing their own fully-fledged AIFM.

Those [still] following the debate on Brexit will be aware that the decision to grant equivalence to countries outside the EU is suspected of being easily reversible and therefore the 3rd Party AIFM's option is also a compelling alternative when the initiator is located in a country benefiting from the equivalence regime.

The main source of income for the 3rd Party AIFM is a management fee representing a percentage of the fund's size that can significantly be lower than the usual figures benefiting to mainstream fund managers. Covering the cost of running a regulated entity with relatively modest management fees points towards two basic business models:

1. Attracting a sufficient volume by accepting on the platform few funds but with large sizes; or

2. Accepting a large number of funds with more modest sizes

The first model is the most straightforward to secure that the 3rd Party AIFM is not exposed to the regulatory risk of being considered by the competent authorities as a letter box entity – and therefore not as the manager of the AIF. As this check on substance is conducted for each AIF, a degree of specialization regarding the investment strategies of the funds accepted on the platform of any 3rd Party AIFM gives confidence regarding his/her ability to perform the portfolio or the risk management function under the AIFMD.

Our experience in the market shows that 'large' funds can afford to have their proprietary structure in the form of an AIFM, meaning that 3rd Party AIFMs are more biased towards attracting a sufficient high number of 'small' funds with potentially a relatively diversified panel of investment strategies.

The question is then for the 3rd Party AIFM – in light of his/her resources and experience – to determine to which degree the investment strategies can differ one from the other without being rightfully considered as a letter box entity by the regulator.

The answer to the question above is dependent on whether the 3rd Party AIFM decides to delegate either the portfolio management or the risk management function. Conceptually, delegating one of these two functions should allow for a larger variety of investment strategies successfully accepted on a platform.

Keeping the portfolio management function internally and delegating the risk management function is according to us the less likely option to produce the needed economies of scale as the portfolio management function requires deal making skills which, depending on the strategy of the fund, can be extremely expensive.

On the contrary, keeping in-house the risk management function and delegating the portfolio management function is more promising for producing the required economies of scale and increasing the substance needed to perform the duties of an AIFM while at the same time expanding the bandwidth of investment strategies of a specific platform.

However, this can only be achieved if the risk management function is adequately structured by abiding to the following basic principles:

    • Recognizing that the risks of liquid assets cannot be identified, measured and managed in a similar manner as the ones of illiquid assets
    • Managing the risks through the support of dedicated on-line tools using various indices is probably a good starting point for liquid assets, but much less so for illiquid assets
    • Identifying from the start that the challenges of managing the risks related to illiquid assets lie in the ability to access the right information in due time, collect and use this information in a structured manner to quantify the risks and initiate early corrective actions if necessary
    • The previous point must be discussed during the contractual negotiations with the entity that will perform the portfolio management function and the corresponding information exchange system should be structured ex-ante
    • Staffing appropriately the risk management function

While this option keeps the risk management function in-house, the tools and methodologies need to be up to standard in order to withstand the reported increasing scrutiny of the regulator. LDS Partners has put in place a fully-fledged service which provides the 3rd party AIFMs with the necessary reports and analyses to be able to fully cover the risk management function. The responsibility remains with the 3rd party AIFM but he/she disposes of all necessary input to be able to assume the risk management function while having access to specialists' know-how and up to date regulatory requirements.

For any question or comment about this post please contact us at LDS Partners:

LDS Partners - This email address is being protected from spambots. You need JavaScript enabled to view it. - T +32 474 96 05 60
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