Acknowledgements

Alternative investing in illiquid assets has become increasingly popular in the past few decades. For some long-term investors, especially family offices and endowments, the label “alternative” may no longer be appropriate as their exposure to private equity and real assets has risen to 20 – 30 percent, in some cases even more. While pension funds and insurance firms usually allocate a comparatively smaller share of their capital to alternative asset classes – reflecting, among other things, different liability profiles and regulatory requirements – their exposure has also increased considerably over time.

Alternative investing is expected to gain further momentum as investors chase yields in an environment where policy rates look set to remain low. Higher expected returns typically come with higher risk. But not only that. The nature of risks in alternative investing in illiquid assets is fundamentally different from risks that investors are exposed to when allocating capital to marketable assets. This is a key lesson investors have learned in the recent global financial crisis, which culminated in the collapse of Lehman Brothers in the fall of 2008. In light of this experience, a growing number of them have adopted new asset allocation models that focus on asset class-specific risk premiums.

Harvesting asset class-specific risk premiums requires asset class-specific risk management techniques. However, as far as investments in private equity funds and similar structures are concerned, the development of such techniques has not kept pace with the rapid increase in investors' exposure to these assets. Almost half a decade after the Great Recession, investors still find surprisingly little guidance in the existing literature in measuring risk in their illiquid portfolios and managing this risk efficiently. Meanwhile, regulators have identified the widening gap between the rise in alternative investing and the use of appropriate tools to measure and manage the risks associated with such investments as a key issue. New regulatory initiatives, such as Solvency II, encourage investors to develop their own proprietary models, in the absence of which they will have to adopt a standard model that imposes high capital requirements for private equity and similar assets.

In aiming at narrowing the gap between the growing importance of alternative investing and the availability of appropriate risk management tools, this book ventures, almost by definition, into unknown territory. Luckily, in our journey into terra incognita we were able to tap into the deep pool of knowledge of a wide range of investment professionals, risk managers and academics. All of them deserve our deep gratitude for making their invaluable insights and precious time available to us.

First and foremost, we would like to thank our fellow members of the working group on developing risk measurement guidelines, a group of practitioners that was set up by the European Venture Capital and Private Equity Association (EVCA) in the spring of 2010. Specifically, our sincere thanks go to Davide Deagostino (BT Pension Scheme); Ivan Herger (Capital Dynamics); Niklas Johansson (Cogent Partners); Lars Körner (Deutsche Bank Private Equity); Pierre-Yves Mathonet (formerly European Investment Fund and now ADIA); and the group's secretary Cornelius Müller (EVCA). Specifically, this working group was tasked to set up a framework for measuring and managing risk in private equity, within which investors may develop their own proprietary risk models in compliance with existing and emerging regulation. The initiative was supported by Dörte Höppner, EVCA's secretary general, to whom the authors, and indeed the entire working group, are deeply indebted.

Furthermore, we would like to thank the members of EVCA's Professional Standards Committee, and especially its chairman Vincent Neate (KPMG), for providing extremely helpful comments and suggestions throughout the process. The guidelines were finally approved by EVCA's Board, chaired by Vincenzo Morelli (TPG), in the fall of 2012. The authors would like to express their gratitude for the Board's support of the guidelines, which have evolved into the present study.

There are few areas where the symbiosis between academic research and practical applications is more intensive than in financial economics and risk management. In drafting EVCA's risk measurement guidelines, the working group greatly benefited from a first-class academic advisory board consisting of Ulf Axelson (London School of Economics and Political Science), Morten Sørenson (Columbia Business School) and Per Strömberg (Stockholm School of Economics and University of Chicago Booth School of Business). Their advice has been extremely important in ensuring the academic rigor the subject at hand requires. Professors Axelson, Sorenson and Strömberg have also served as an important sounding board in preparing the manuscript of this book, for which we are extremely grateful.

Other world-class academics have also commented extensively on earlier drafts or individual chapters and provided extremely useful guidance in developing a coherent risk management framework for illiquid assets. These include Oliver Gottschalg (HEC Paris); Robert Harris (University of Virginia); Tim Jenkinson (Oxford Said Business School); Christoph Kaserer (Technical University Munich); Josh Lerner (Harvard Business School); Ludovic Phalippou (Oxford Said Business School); and Peter Roosenboom (Rotterdam School of Management). All of them deserve our special thanks.

While this book aims to reflect the latest academic thinking on a subject that is constantly evolving, the main addressees of the present study are limited partners in private equity funds and similar structures. Many investment and risk management practitioners have shared their deep knowledge and experience with us and provided detailed comments on individual draft chapters or the entire manuscript. At AlpInvest Partners, we would like to thank the firm's partners for their continuous encouragement and their support in getting this project to the finish line. Furthermore, we have benefited greatly from specific comments and suggestions by Edo Aalbers and Robert de Veer of AlpInvest Partners' Portfolio and Risk team. At Montana Capital Partners, our sincere thanks go to Lara Lendenmann and Marco Wulff. We are also deeply indebted to John Breen (Sanabil); Pascal Cettier (Aeris Capital); Philippe Desfossés (ERAFP); Pieter van Foreest (APG); Ivan Popovic (Aeris Capital); John Renkema (APG); Alfred Rölli (Pictet); Christophe Rouvinez (Müller-Möhl Group); Pierre Stadler (Pictet) and Ashok Samuel (GIC). All of them have been extremely generous with their precious time in reading the manuscript and helping us determine best practices in measuring and managing risk in illiquid assets other investors will hopefully benefit from.

We also owe special thanks to our publishing team at Wiley, especially Werner Coetzee, Samantha Hartley and Jennie Kitchin. Sarah Lewis has done an outstanding job as our copy editor. Prakash Naorem of Aptara has very aptly led the production process, for which we are most grateful.

The greatest amount of gratitude is due to our families, however. Indeed, this book would not have been possible without their constant support and understanding and the time they have given us over the past few years. We would therefore like to dedicate this book to them.

Peter Cornelius
Christian Diller
Didier Guennoc
Thomas Meyer