Risk Measurement Guidelines - EVCA

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10GlossaryEntries in the glossary marked with anasterix (*) are derived from the EVCA’sHandbook of Professional Standards forthe Private Equity and Venture CapitalIndustry (2012 Edition) in order to ensureconsistency across all EVCA publications.The remaining glossary and definitionsreflect the scope and objective discussedwithin the EVCA Risk MeasurementGuidelines.> Asset liquidity riskAsset liquidity risk relates to the relative ease andpromptness with which a financial instrument may besold at a fair price when desired.> CommitmentA limited partner’s obligation to provide a certain amountof capital to a fund when the general partner requestscapital.> Discounted cash flow (DCF)Discounted cash flow is a method of valuing aninvestment by estimating future cash flows and takinginto consideration the time value of money.> Distressed or forced transactionA forced liquidation or distressed sale (i.e., a forcedtransaction) is not an orderly transaction and is notdeterminative of fair value. An entity applies judgmentin determining whether a particular transaction isdistressed or forced.> Distribution(s)*All amounts returned by the fund to the LPs. This can bein cash, or in shares or securities (in the latter case knownas “Distribution(s) in specie”).36 I EVCA Risk Measurement Guidelines 2013
Distribution waterfallDuring the lifetime of a fund, liquidity events occurand distributions are made, based on a predetermineddistribution waterfall, whereby limited partners typicallyreceive a certain amount of the profit first before thegeneral partners can receive their share.> Drawdown(s)*LP commitments to a fund are drawn down as requiredover the life of the fund, to make investments and to paythe fees and expenses of the fund. When LPs are requiredto pay part of their commitment into the fund, the GPissues a drawdown notice. Drawdowns are sometimesreferred to as “capital calls”.> Fair valueThe fair value is the price at which an orderly transactionwould take place between market participants at thereporting date (measurement date).> Fund or private equity fund*A private equity or venture capital fund. A closed-endedlimited partnership is a common structure used for sucha fund, but other legal forms are also used e.g. FCPR, KG,SICAR, AB, BV and NV, etc.> Fund-of-fundsFund-of-funds is a generic term used in these Guidelinesto refer to any designated pool of investment capitaltargeted at investment in underlying private equity funds.> Funding riskFunding risk relates to an investor’s ability to meet itsfunding obligations when they are due without incurringunacceptable losses.> General partner (GP)*GP is the term typically used to refer to the differententities and professionals within a private equity firmwhich source, analyse, negotiate and advise on potentialtransactions as well as invest and manage the fund.More specifically, it means the general partner of a limitedpartnership. The term GP may also be used to refer tothe manager or investment adviser of a fund, dependingon the fund structure.> Investee companyThe term investee company refers to a single business orgroup of businesses in which a fund is directly invested.> J-curveThe J-curve refers to the fact that, in the initial years of aprivate equity fund, its cash flow and return performancewill always be negative as drawdowns for investment andmanagement fees significantly exceed any distributionsto limited partners from generated income or capital gain.From the investors’ perspective, this phenomenon resultsin a temporary accounting loss which, when graphicallyillustrated with the profits and positive cash flows infuture years, produces a curve resembling the letter J.A portfolio with many young funds will have a steepJ-curve, while a more mature portfolio will have a lesspronounced J-curve.> Limited partner (LP)*An investor in a fund. More specifically, it means thelimited partner in a limited partnership. LPs in a fundinclude sophisticated investors, experienced high networthindividuals and entrepreneurs, sovereign wealthfunds, endowment funds, foundations and family offices.> Limited partnership*A legal structure commonly used by many private equityand venture capital funds. It is used especially whencatering for broad categories of international investorsand looking to make cross-border investments.The partnership is usually a fixed-life investment vehicle,and consists of a general partner (the GP/manager of thefund, which has unlimited liability) and limited partners(the LPs, which have limited liability and are not involvedwith the day-to-day operations of the fund).> Market participantsMarket participants are potential or actual willing buyersor willing sellers when neither is under any compulsion tobuy or sell, both parties having reasonable knowledge ofrelevant facts and the ability to perform sufficient duediligence in order to be able to make orderly investmentdecisions related to the transaction.EVCA Risk Measurement Guidelines 2013 I 37
Page 4 and 5: IntroductionInvestors in private eq
Page 6 and 7: 1Key Objectives ofPrivate Equity Ri
Page 8 and 9: Exhibit 1Prior to the financial cri
Page 10 and 11: For this purpose, a risk model for
Page 12 and 13: 3Overview ofMain Risks to beConside
Page 14 and 15: Interest rates and refinancing term
Page 16 and 17: The volatility is estimated by meas
Page 18 and 19: Figure 2: Backward annualisation (V
Page 20 and 21: Exhibit 4How can we calculate a por
Page 22 and 23: Exhibit 4(2) For each scenario i an
Page 24 and 25: In practice, the bottom-up approach
Page 26 and 27: In a buoyant economy, proceeds from
Page 28 and 29: The use of correlation as a measure
Page 30 and 31: II. Top-down approachThis approach
Page 32 and 33: 9ApplicationGuidanceThis section pr
Page 34 and 35: Discount rates can also be used to
Page 38 and 39: Net asset value (NAV)The NAV of a f
Page 40: The ‘Private Equity Fund Risk Mea

Risk Measurement Guidelines - EVCA

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