Risk Measurement Guidelines - EVCA

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Net asset value (NAV)The NAV of a fund is the amount estimated as beingattributable to the investors in that fund on the basis ofthe fair value of the underlying investee companies andother assets and liabilities.> Net present value (NPV)The NPV of a fund is the discounted current value ofthe expected future cash inflows and outflows, calculatedusing an appropriate cost of capital.> Orderly transactionAn orderly transaction is a transaction that assumesexposure to the market for a period prior to the date ofthe transaction to allow for marketing activities that areusual and customary for transactions involving suchassets or liabilities.> Partnership AgreementThe Partnership Agreement mainly covers terms, fees,structures and other items agreed between the limitedpartners and the general partner. It also determinesthe timing of distributions to the limited partner andhow profits are divided among the limited partnersand general partner.> Private equity*Private equity provides funding in equity form from fundsto acquire a majority or minority stake in portfoliocompanies in different stages of development across awide range of industries. The term is widely used andencompasses venture capital (typically a minority stakeinvested in an early-stage or pre-profitable business),through to enterprise capital (a minority or majority stakeinvested in portfolio companies at critical points of theirdevelopment). When majority stakes are acquiredthrough enterprise capital investments, these arecommonly referred to as “buyout” transactions.> Reporting dateThe date for which the risk measurement is beingprepared. It is the same as the measurement date.> Secondary investments or secondaries*These terms are typically used to refer to the transfer of anLP’s contractual commitment and interest in an existingfund to another LP (“secondary fund investment”).In contrast, the term secondary (direct) sale is used todescribe the sale by a fund of its interests in one or moreportfolio companies to a fund managed by a different GP.> Stale pricingStale pricing is a result of reported net asset valuesof a fund not incorporating all available information.Therefore, stale pricing leads to a time-lag betweenobservable market valuations and valuations in privateequity portfolios.> Undrawn commitmentA significant part of a fund’s commitments will not beneeded immediately but only as investment opportunitiesarise. They remain with the limited partners and arecalled by the general partner over the agreed investmentperiod as and when investment opportunities areidentified. This capital is a fund’s undrawn commitment.> ValidationValidation is the process of determining the degree towhich a model is an accurate representation of the realworld from the perspective of the intended uses of themodel, and whether the logic followed by the modelconforms to economic and mathematical principles.> Venture capital*Funding typically provided in equity form to companiesin early stages of their life cycles, i.e. seed, early-stage,development, or expansion. Historically the term wasused to refer generally to all private equity investments,which is why many private equity associations refer onlyto venture capital in their name.> VerificationVerification refers to the process of determining whetherthe output from the model conforms to actualexperiences in the real world.38 I EVCA Risk Measurement Guidelines 2013
About the EVCAEuropean Private Equity & Venture Capital AssociationThe EVCA is the voice of European private equity.Our membership covers the full range of private equity activity, from early-stage venture capital to the largest private equityfirms, investors such as pension funds, insurance companies, fund-of-funds and family offices and associate members fromrelated professions. We represent 700 member firms and 400 associate members.The EVCA shapes the future direction of the industry, while promoting it to stakeholders such as entrepreneurs, business ownersand employee representatives.We explain private equity to the public and help shape public policy, so that our members can conduct their business effectively.The EVCA is responsible for the industry’s professional standards, demanding accountability, good governance andtransparency from our members and spreading best practice through our training courses.We have the facts when it comes to European private equity, thanks to our trusted and authoritative research and analysis.The EVCA has 25 dedicated staff working in Brussels to make sure that our industry is heard.DisclaimerNo member of the Private Equity Risk Measurement Guidelines working group thereof can accept any responsibility or liability(whether in respect of negligence or otherwise) to any party as a result of anything contained in or omitted from the Guidelinesnor for the consequences of reliance or otherwise on the provisions of these Guidelines.
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 36 and 37: 10GlossaryEntries in the glossary m
Page 40: The ‘Private Equity Fund Risk Mea

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