MathFinance Colloquium:Risk modelling for private equity

Equity investments are risky. There are two major components to the risk of an equity investment: the risk that the investment is lost in a default of the investment target; and the risk that the investor can only exit the investment with a loss. For publicly traded equity, these risks are known as counterparty risk and market risk. The transparency of the market provides a large amount of information and a wide range of methods is available to model these risks. In contrast, information is scarce for private equity investments limiting the usefulness of elaborate models. The task at hand is then to design a model of private equity risk that is as simple as possible while still capturing the essential features of the problem. We will present such a model and show that it is capable of providing expected loss and economic capital figures suitable for risk management.