Webinar - Private Equity at Center Stage: Maximizing Long Term Performance of a Diversified Portfolio Inclusive of Private Illiquid Assets
December 10, 2019
Join Dr. Keith Black, CAIA, CFA, Managing Director of Curriculum and Exams, CAIA Association, with Emilian Belev, CFA, ARPM, Northfield for a webinar discussing Private Equity at Center Stage: Maximizing Long Term Performance of a Diversified Portfolio Inclusive of Private Illiquid Assets
Any portfolio has two fundamental parameters that determine its suitability, regardless of whether it includes public or private investments. The first parameter is the projected performance over the expected investment horizon of the specific investor. The second one is the performance over horizons shorter than the full investment horizon, as the means to cover cash outflows from periodic liabilities and expenditures.
The two objectives are related due to the fact that performance over long periods is a sequence of performance realizations over shorter term periods. In practice, however, the unobservable values of non-tradable assets pose a challenge to establish the relationship between their periodic and long-term performance. Our ultimate goal is to propose an approach for optimal total portfolio investing that maximizes long term performance, while also maximizing the investor confidence of covering periodic liquidity needs. Meanwhile we aim to address appropriately the complexity of a diversified asset portfolio without making assumptions about the unobservable aspects of performance of private assets.
To achieve these objectives, we first need an understanding of all key features of the usual private asset investment vehicles used by investors. We have invited one of the most reputable experts on illiquid assets - Dr. Keith Black, who heads CAIA (Chartered Alternative Investment Analyst) Association's curriculum and exams - to start our presentation with a detailed overview of the private asset marketplace, the typical investment structures, and the current trends in this market.
Subsequently, we demonstrate how cash flow analysis can benefit the investor’s quest for better transparency of the risk-return characteristics of private assets, while sidestepping the need for appraisal and accrual accounting derived returns. Our innovative cash flow analysis is based on collaboration between Northfield and Aspequity that combines forecasted expected investment cash flows with the application of Northfield’s risk models, building a probability distribution of private fund cash flows – both inflows and capital calls. We show how the periodic probability distributions of cash flows aggregate into a cumulative cash flow statistical distribution over the lifetime of a private investment. The analysis demonstrates that the probability distribution of cumulative cash flows over the lifetime of private funds has non-normal properties. This puts under question some set-in beliefs about the valuation and deal flow management of illiquid assets, and sets the stage for new and superior approaches that are part of a currently forming standard in the industry. Finally, we outline a rigorous approach that utilizes the cash flow forecasting and risk models tools to deliver an optimized asset allocation consisting of both liquid and illiquid assets that maximizes long term expected performance, and meets an investor’s liquidity targets over time with a chosen level of confidence.