Mastering Illiquidity: Risk management for portfolios of limited partnership funds

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Limited Partnership Fund Exposure to Financial Risks

Over the past few decades, investors have increased substantially their exposure to private equity and real assets, predominantly through commitments to limited partnership funds. At the same time, important efforts have been made to improve financial risk management. Arguably, these efforts were to a large extent motivated by repeated financial crises, such as the stock market crash in October 1987; the financial turmoil associated with the balance of payments crises in several emerging markets in the late 1990s and early 2000s; the bursting of the tech bubble in 2000; the sub-prime debacle in the USA that led to the collapse of Lehman Brothers and the Great Recession; and, most recently, the European sovereign debt and banking crisis. However, as Bongaerts and Charlier (2009) argue, the academic literature at the intersection of financial risk management and private equity has remained surprisingly close to an empty set. Similarly, contributions by practitioners have remained rare, with Weidig and Mathonet (2004) and Diller and Herger (2008) representing notable exceptions.

Similar observations can be made on the regulatory side. While the last couple of decades have seen important changes in bank regulation, which have been accompanied by a rapidly expanding literature on the subject, there is very little on the regulatory treatment of private equity and real assets. The Basel Committee on Banking Supervision (BIS, 2001) ...