CAIA- 12 - Measuring Private Equity Risk

Question 1

There are 4 key risks associated with private equity:

1. ___ risk
2. ___risk
3. ___or ___risk
4. ___or ___risk

Answer 1

There are 4 key risks associated with private equity:

1. Market risk
2. Liquidity risk
3. Commitment or funding risk
4. Capital or realization risk

Question 2

___ risk refers to the economic uncertainty that impacts the price/value of an asset.

Answer 2

Market risk refers to the economic uncertainty that impacts the price/value of an asset.

Question 3

___ risk refers to the risk that PE investors face when trying to sell their partnership stakes.

Answer 3

Liquidity risk refers to the risk that PE investors face when trying to sell their partnership stakes.

Question 4

___ or ___risk refers to the risk that investors are unable to meet their contractually binding commitments to a PE fund.

Answer 4

Commitment or funding risk refers to the risk that investors are unable to meet their contractually binding commitments to a PE fund.

Question 5

___ or ___risk refers to the long-term risk that PE investors are unable to recoup their invested capital at the time of exit.

Answer 5

Capital or realization risk refers to the long-term risk that PE investors are unable to recoup their invested capital at the time of exit.

Question 6

___ risk tends to be independent between PE firms and, thus, can be ___ ___in portfolios of funds.

Answer 6

Operational risk tends to be independent between PE firms and, thus, can be diversified away in portfolios of funds.

Question 7

Financial risk primarily comprises ___ risk and ___ risk.

Answer 7

Financial risk primarily comprises market risk and liquidity risk.

Question 8

Financial risk can/cannot be diversified away.

Answer 8

Financial risk can be diversified away.

Question 9

Most PE investments follow a ___-to-___philosophy that involves implementing a value creation plan and then selling the investments for a profit.

Answer 9

Most PE investments follow a buy-to-sell philosophy that involves implementing a value creation plan and then selling the investments for a profit.

Question 10

During the restructuring phase, portfolio companies (are/are not) subject to the same regulations and reporting requirements as before.

Answer 10

During the restructuring phase, portfolio companies are not subject to the same regulations and reporting requirements as before.

Question 11

Some institutional investors adopt a ___-to-___philosophy that implements a value creation plan and holds the portfolio companies after restructuring them.

Answer 11

Some institutional investors adopt a buy-to-keep philosophy that implements a value creation plan and holds the portfolio companies after restructuring them.

Question 12

The following are arbitrage opportunities within private equity:

1. Capture ___ ___
2. Benefit from ___
3. Earn ___ ___

Answer 12

The following are arbitrage opportunities within private equity:

1. Capture niche opportunities
2. Benefit from restructuring
3. Earn illiquidity premium

Question 13

There are 2 ways to value an asset:

1. Current ___ value
2. ___value of ___ ___ ___

Answer 13

There are 2 ways to value an asset:

1. Current market value
2. Present value of future cash flows

Question 14

Risk Measurement Guidelines published by EVCA indicate that the risk of PE is best characterized by the LP’s ___ in the ___ ___.

Answer 14

Risk Measurement Guidelines published by EVCA indicate that the risk of PE is best characterized by the LP’s share in the PE fund.

Question 15

Undrawn commitments expose LPs to ___ or ___risk.

Answer 15

Undrawn commitments expose LPs to commitment or funding risk.

Question 16

Commitment risk can be reduced or avoided by not ___ and by holding undrawn assets in ___-___securities.

Answer 16

Commitment risk can be reduced or avoided by not overcommitting and by holding undrawn assets in risk-free securities.

Question 17

The perspective that GPs act as lenders to LPs for undrawn commitments (is/is not) widely accepted in the industry.

Answer 17

The perspective that GPs act as lenders to LPs for undrawn commitments is not widely accepted in the industry.

Question 18

The ___ ___ ___measure provides an estimate of likely losses based on historical prices under normal economic conditions.

Answer 18

The value at risk measure provides an estimate of likely losses based on historical prices under normal economic conditions.

Question 19

The key risk measure underlying VAR is ___.

Answer 19

The key risk measure underlying VAR is volatility.

Question 20

Non-financial firms use an equivalent of VaR called ___ ___ ___ ___.

Answer 20

Non-financial firms use an equivalent of VaR called cash flow at risk.

Question 21

___ ___ ___ ___is defined as the maximum deviation between actual cash flows and a pre-set level of cash flows.

Answer 21

Cash flow at risk is defined as the maximum deviation between actual cash flows and a pre-set level of cash flows.

Question 22

(CFaR/VaR) is typically computed for short periods of time, whereas (CFaR/VaR)is computed over longer periods.

Answer 22

VaR is typically computed for short periods of time, whereas CFaR is computed over longer periods.

Question 23

What is the equation for a scenario’s gain/loss?

Answer 23

[PV - Avg(PV)] / n