Stand Out: A Smarter Way to Handle Private Equity Risk

For Financial Professional Use Only

Private equity (PE) is poised for a significant surge in activity. Recent regulatory changes, primarily the reversal of the ERISA restriction that blocked PE investments in 401(k) plans, are opening the door for new investors. This shift, combined with the asset class's history of solid returns, is reigniting interest among clients, including high-net-worth individuals with over $5 million in qualified investor portfolios. As an advisor, this presents a unique opportunity to stand out by addressing a critical, often ignored, aspect of PE investments: risk management.

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The Hidden Risk of Private Equity

A major stumbling block with private equity is that it is not marked to market throughout the investment's life. This means there's no direct way to measure its daily price volatility, which is crucial for calculating a portfolio's covariance—the degree to which assets move in the same or opposite direction. Many investors treat PE as a low-volatility asset, similar to a Treasury Bill or cash, and thus exclude it from their risk calculations. This is a dangerous assumption.

Ignoring the inherent price fluctuations in PE can lead to an overestimation of a portfolio's stability and expose clients to significant, unmanaged risk. The very feature that endowments have long appreciated—the lack of markdowns in down markets—is the same feature that has led to massively overextended institutional investments. As retail investors enter the market, increased pressure to provide more transparency and liquidity could introduce new volatility, intensifying the need to properly account for this risk.

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Pave's Solution for Proper Risk Management

To properly manage risk, you first have to measure it. Pave offers a unique solution by providing a method to calculate the variability of a private equity position. This allows you to accurately incorporate PE into your portfolio's risk calculations and create an optimized position that aligns with your client's long-term investment goals and risk profile.

By using Pave, you can provide your clients with a transparent and holistic view of their portfolio's risk, rather than simply ignoring a significant portion of their investments. This capability not only helps you better serve existing clients but also serves as a powerful selling point to attract new ones, particularly those with valuable PE holdings. It demonstrates that you understand the complete picture of their financial health and are proactive in managing risks that others overlook.

To learn more, please reach out by emailing sales@pavefinance.com or using the “book demo” below. We look forward to speaking with you.

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