In a recent exclusive interview, Prabhav Sharma, a renowned private equity and venture capital investor, shared his unique perspective on risk management and mitigation planning for private equity investments. Sharma explained that investing in private equity and venture capital is not quite the same as investing in public markets due to distinct features like illiquidity, long-term commitments, and uncertain cashflows. These characteristics necessitate a specific approach to risk management, finely tuned to the private equity and venture capital realm.

“Essentially, we are contending with three key risks: market risk, liquidity risk, and funding or cashflow risk,” Sharma elucidated. These risks require specific risk measures for effective management. He emphasised that these include value-at-risk (VaR) for market risk, liquidity-adjusted VaR (LVaR) to account for illiquidity and cashflow-at-risk (CFaR) for funding risk. By using these metrics, investors can dynamically model the fund’s lifecycle, which helps in understanding and managing the risk exposure that evolves over time.

The science of constructing risk-mitigation portfolios: A blend of art and mathematics

Shifting the focus from risk identification to risk mitigation, Sharma delved into the intricacies of portfolio construction. “Creating a portfolio that mitigates equity risk isn’t about throwing in some bonds and calling it a day. It’s an intricate process that requires the right mix of strategies,” he highlighted.

Source: Khaleej Times