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 contact@ldspartners.com

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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