Saturday, March 20, 2021

Measuring private funds' liquidity risk

Managing capital calls isn't something widely discussed in private markets research, but LPs know it's a crucial part of the investment process...
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The Research Pitch
March 20, 2021
How LPs can better prepare for unexpected capital calls
A quick note: We're inviting all allocators and limited partners to share your market insights in our annual Institutional Investor Survey, which is anonymous and only takes a few minutes. Thanks!
From the limited partner perspective, research in the private markets tends to focus on the process of determining an allocation, identifying managers, and conducting diligence.

Managing capital calls isn't as widely discussed, but LPs know this is a crucial part of the investment process. Having an unexpectedly large capital call can strain an LP's liquidity profile and, in rare instances, lead to a default.

While capital call estimation techniques are available, most fail to fully account for the variability seen in capital call events or appreciate the idiosyncratic nature of an LP's specific private fund portfolio.

At PitchBook, our team has spent extensive time on our cash flow management solutions framework, and now we are adding a new chapter to that research: capital call at risk (CCaR).

Modeled after the popular risk management tool value at risk (VaR), CCaR is designed to arm LPs with reasonable expectations for what a large liquidity requirement could look like in their private fund portfolios.

We introduce three variations of the CCaR metric, allowing users to customize confidence levels and calibrate the framework to fit a fund-level and portfolio-level view.

To determine the CCaR values, we employ our cash flow management solutions framework, which provides future cash flow projections for a given fund portfolio.

In our latest research, we dive into a case study where we construct variations of hypothetical LPs using real buyout fund cash flow data from the PitchBook Platform.

The case study is just one example of a complex issue, but it provides a proof-of-concept for LPs looking for new ways to measure risk in their portfolios. We encourage PitchBook clients to reach out to their account managers or our institutional research team to learn more.
 
Best,

Zane Carmean, CFA
Quantitative Research Analyst
Market Updates
Last year, PE deal value in the US middle market hit the highest annual number on record—fueled by an absolutely massive Q4.

Our 2020 Annual US PE Middle Market Report covers the trends that drove this recovery in the wake of the pandemic, plus the slightly different fortunes for exits and fundraising.

We also spotlight our latest analysis into the fund performance of first-time managers:
read the report
 
Emerging Tech Research
INTERNET OF THINGS: The future is both bright and uncertain for this maturing industry, making it a complex risk-reward scenario for investors, writes analyst Brendan Burke.

What's driving attractive new opportunities?

Which technologies have fallen short of the hype?
Webinars & Events
Our analysts weighed in on the causes of this drop-off.
What do the preliminary numbers show for Q3 fund performance?

Why are first-time managers having more fundraising success in VC than PE?

Analysts Hilary Wiek and Wylie Fernyhough hosted a webinar this week to discuss the latest performance data for private capital funds: watch the replay.

Also, we've got one more event for your radar:
  • March 24 — Our analysts will walk through the latest VC valuations data across the US and Europe. Register here.
Deal Commentary
Fintech analyst Robert Le weighs in on the news that payments giant Stripe raised $600 million at an astonishing $95 billion valuation:

"This latest funding round by Stripe will enable the company to continue its global expansion, especially within Europe where there are other technically savvy payments companies like Adyen and Checkout.com.

"Online payments companies have seen strong growth in payment volumes as the pandemic accelerated ecommerce adoption. We estimate that ecommerce as a share of total retail sales jumped to well over 20% in 2020, representing a 50% growth in a single year.

"Stripe is well-positioned to capitalize on this trend as it not only has the widest set of payments services like recurring billing, payment facilitation, and physical terminals, but also ancillary support services like fraud management, card issuing, and banking as a service.

"We believe that this will be the company's final private round as it prepares for an IPO this year.

"We also expect the company to look to expand to other areas of financial services to support its enterprise customers including accounting/payroll, B2B payments, and commercial insurance—signaled by participation from Axa and Allianz in this round."

 
Robert Le

Senior Emerging Technology Analyst
Fintech
In the News
A sample of our insights recently featured in the press:
  • Will the recent controversies surrounding Robinhood hurt the company's IPO outlook? Analyst Robert Le offers his view. [CNN]

  • An analysis into the percentage of female decision-makers at US venture capital firms leveraged our data team's work. [Axios]

  • Our data analysts also provided numbers that show how big VC is getting in Texas. [WSJ]
If you're a media member interested in interviewing our analysts, contact our PR team.
ICYMI
Here are highlights from our other research content published this quarter:

Market updates Thematic research Emerging Technology Research deep dives Coming next week (subject to change)
  • Quantitative Perspectives: US Private Equity's Resilience in Unprecedented Times
  • Introducing our Private Equity Barometer
  • 2020 Annual Real Estate Report
  • Venture Debt: A Maturing Market in VC
  • ETR: Fintech
Thanks for reading! Feel free to email us any time with feedback, questions or tips!

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