As evidenced by recent EU regulations, Liquidity Stress Testing (LST) is a vital topic for Alternative Investment Fund Managers (AIFMs) in sectors like private equity, private debt, real estate, infrastructure, and similar. Generally, a stress testing exercise assesses the impact of (various potential) adverse shocks on the future performance of a given financial asset. From the regulatory perspective, stress testing is viewed as an important risk management tool that supports the fund manager’s decision-making process and crisis management planning.
“AIFMs shall regularly conduct stress tests, under normal and exceptional liquidity conditions, which enable them to assess the liquidity risk of the AIFs and monitor the liquidity risk of the AIFs accordingly.” (AIFMD, Article 16(1) )
„A manager should have a strong understanding of the liquidity risks arising from the assets and liabilities of the fund’s balance sheet, and its overall liquidity profile, in order to employ LST that is appropriate for the fund it manages.” (ESMA guidelines on liquidity stress testing in UCITS and AIFs, Point 18 )
From our experience, many fund managers (and investors) are desperately looking forward to replacing their internal Excel-based stress testing prototypes by something more efficient. To keep the manual effort minimal, the PE industry craves for a powerful and highly automated LST solution that is aligned with current regulatory requirements. In this article, we describe the new AssetMetrix LST tool, which is designed to fill this gap. Our solution is based on our well-established and market-validated private capital fund forecasting engine, which has been in use by various clients for over five years now.
Liquidity Stress Testing Requirements and Features
The Alternative Investment Fund Managers Directive (AIFMD) obliges GPs to “regularly conduct stress tests, under normal and exceptional liquidity conditions.” Concretely, this EU regulation act refers to Article 16(1) of the AIFMD (2011/61/EU) and to Articles 47 and 48 of the supplementary Level II Regulation (No 231/2013). The “ESMA Guidelines – On liquidity stress testing in UCITS and AIFs” further specify the details of the required stress test exercises and apply from 30 September 2020.
In the spirit of these recent AIFMD and ESMA guidelines, AssetMetrix developed a highly sophisticated Liquidity Stress Testing module tailored for private capital funds (and fund-of-funds). In the following table, we compare the requirements defined by the “ESMA Guidelines” and the capabilities of our new LST module.