Private Market Risk

Private market investment - private equity - is becoming an increasingly established long-term asset class in the portfolios at the institutional level, particularly under low interest rate environment. The challenges to gain access to private market products notwithstanding, the associated risks within the PE space remains relatively underexplored.

The significant risks in private equity include capital risk, liquidity risk and funding risk. Matured PE setup would also perform in-depth analysis on the realization risk. Traditional strategies and non-traditional strategies alike, risk management solutions are widely pursued among PE participants, which hitherto serve to mitigate some of these significant risks.

But as the PE segment gains traction across Asia, market participants (regulators included) have since gained crucial insight into the real risk of managing a private equity portfolio, which tend to prove more complex than expected. The fact that PE structures are designed so that investors are locked in for its full term without an opportunity to redeem their commitment implies significant liquidity risk, as compared to their traditional investment counterparts. And there were signs of mounting concerns about the high degree of uncertainty in the exit timeline, especially in the unique context of the emerging Asia environment. Adding to the gloom, the market has since witnessed a hike in cases of 'delayed exits', attributed in part to geopolitical and policy implications in the emerging Asia region.

Alternative Solutions

Alternative risk solutions have grown to form an integral part of the risk management in private market investment, with much emphasis being placed on mitigating capital risk and liquidity risk. This set of risk management practices and processes aims to provide a more comprehensive hedge against shocks in the private market environment.

Alternative risk management processes in private equity often involve the complex participation of an unique suite of institutional finance players and underwriters out of the PE space, and are designed with the well-defined aim to effectively spread the risks across various participants and stakeholders. Under the strategic setup, investors (in particular, small and mid-market PE/VC) would be in a better position to secure capital preservation, and most importantly, to hedge against liquidity risk amidst uncertainties in the private market environment.

The SDGA risk management team provides a comprehensive set of alternative risk solutions for clients, to eliminate capital risk and to better manage liquidity and funding risks, by reducing their exposure to unexpected shocks in the private equity lifecycle. Our team is fully integrated with industry coverage partners in the U.S., which enabled us to place our clients in a strategic position to define the well-needed contingency exit plan. This will allow our clients to pass on the real risk in private market portfolios to niche institutional setups who are well positioned to take on risks from a longer-term perspective.