Private Asset Scenario Models

For many institutional investors, private assets are a welcome addition to their portfolio. They can offer increased return through their illiquidity premium and lower risk through diversification.

The modelling of private asset investments, however, suffers from limited availability of good quality data. Therefore, compared to traditional assets, the modelling of private assets is less data-driven. Additionally, stylized facts, based on well-founded research on categories of private assets, play a greater role in their modelling.

Ortec Finance offers four approaches for modelling private assets: the total return approach, the cash flow approach, the hybrid approach and the proprietary modelling approach. The preferred approach depends on the type of private asset and the available historical data.

These approaches try to capture the asset’s illiquidity premium, downside risk, and idiosyncratic risk as well as possible.

In addition to quantitative risks that can be analyzed through modelling private assets, important qualitative risks should be analyzed, these include, but are not limited to: political risk, collateral management, lack of transparency, unquantifiable model parameter risk and complexity. To combine qualitative and quantitative risks, Ortec Finance offers a scorecard approach to arrive at an overall risk assessment.

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