What alternatives are there for investors looking to gauge risk at the fund level?
“In an ideal world, investors wouldn’t have to rely on loss ratios and there would be a better metric that was harder to game, but it is difficult to figure out what that could be. We do consider some alternatives in the paper, including the standard deviation of the performance of all companies in the portfolio – in other words, how much variation is there below the median performance, or below the benchmark performance for that vintage year.”
Gregory Brown
“We use standardised dispersion analysis whereby we look at deals that show multiples below 0.8x and above 2.5x, but it is hard to
say anything meaningful about deals that exit right around 1x. But there are also plenty of other factors that we consider as indicators of risk, such as team turnover, a step-up in fund size, and strategy drift. In addition, we focus on alignment of interest.”
Michael Barzyk