AssetMetrix’ Liquidity Stress Testing

Liquidity planning and management continue to be crucial topics for private capital funds. The highly illiquid nature of closed-end private equity (or private debt, infrastructure, real estate, …) funds even exacerbates the importance of proper liquidity risk management compared to public mutual funds. Generally, liquidity risk can be viewed from two angles that likely reinforce each other: (1) Market liquidity (or asset liquidity) is the ease with which a given asset can be converted into cash. (2) Funding liquidity (or asset liquidity) is the ability to meet obligations and raise more funds when needed. Funding liquidity risk is vital for Limited Partners (LPs) with significant open commitments, i.e., with relatively young private capital programs. For more mature programs, (secondary) market liquidity might become more relevant, particularly under stressed market conditions.

“The unpredictable timing of capital calls over the life of the PE investment creates a funding liquidity risk for the LPs. Also, these calls are usually accompanied by a short notice period. For instance, PE investors may be asked to provide funds at times when liquidity is tight. These capital calls can occur at times when getting cash involves a high opportunity cost and high liquidity risk for the LPs.“ (Baker et al, Private Equity – Opportunities and Risks (2015), p. 169)

In this article, we describe the new AssetMetrix Liquidity Planning tool based on our well-established and market-validated private capital fund forecasting engine, which various clients have been using for over five years.

Module Features

Our liquidity planning module helps LPs to navigate liquidity even through rough times. The following liquidity dimensions are covered:

• The cash flow forecast results can be displayed in absolute values (in millions), differences (deltas) to the current period, or relative to committed capital.
• The model incorporates diversification effects so that the larger the portfolio, the more fund-specific risk is “diversified away.”
• Our statistical approach allows the calculation of the expected value and percentiles, which can be perceived as worst/best cases. For the Net Asset Value (NAV), these bands can be thought of as potential NAV discounts or premia.
• The supplementary liquidity stress test is based on “stressed scenarios” like the dot-com bubble or the last financial crisis. Moreover, we calculate regulatory stress test scenarios released by the Federal Reserve (Fed), European Banking Authority (EBA), and Bank of England (BoE).
• Our approach focuses not only on short-term liquidity but also supports mid-term and long-term liquidity forecasts.
• The model projects the NAV and net cash flow, which we split into contributions and distributions to distinguish between funding and market liquidity. On this basis, we calculate performance measures like TVPI, DPI, and RVPI.

This comprehensive set of module features allows thorough contingency planning for your private capital portfolio, providing a rich and realistic picture of the future cash flow profile. The multitude of integrated risk dimensions covered by our liquidity planning model makes it the most sophisticated approach in the market.

Benefits of the AssetMetrix approach

Often liquidity planning, cash flow modeling, or stress testing exercises are tedious and repetitive tasks that many LPs manually perform in overloaded Excel workbooks. Our interactive portal-based solution gets the same job done faster, more efficiently, and rigorously. Since our results are always based on the most recent portfolio data, your up-to-date liquidity profile is always just a few clicks away. Once onboarded on our platform, our zero-effort liquidity risk solution makes any (quarterly) data wrangling in Excel obsolete for the user. We automatically update and add new regulatory stress scenarios (once officially released by the authorities), so your liquidity stress results are always “state-of-the-market.” Our portal users get the full picture of their liquidity profile as all analyses are, by default, calculated on fund-, portfolio-, and sub-portfolio levels. Moreover, macroeconomic stress scenarios and the probability bands within each scenario complete this all-encompassing view of liquidity risk. After analyzing their liquidity risk profile in our modern web portal, users can conveniently download their liquidity planning results in Excel or image format. We strongly believe that liquidity planning for private capital fund portfolios has never been easier.

Module Results

Below we provide three examples of the richness and depth of our liquidity planning results. The liquidity tables display

• short-, mid-, and long-term liquidity with horizons from one quarter to up to ten years
• cumulative values (Figure 1), deltas to the current values (Figure 2), and all values relative to the current commitment (Figure 3)
• the base case, which refers to the current macro environment (Figure 1), but also stressed scenarios based on historical macro environments (Figure 2) or hypothetical scenarios from regulatory stress test exercises (Figure 3)

Figure 1: Cumulative – base case

Figure 2: Difference to current – historical scenario

Figure 3: Relative to commitment – regulatory scenario

Need a solution for liquidity planning?

Why is the AssetMetrix solution

• Smarter: get access to our highly sophisticated liquidity forecast methodology
• Better: never tediously model your cash flows in cluttered Excel workbooks again
• Faster: our web portal provides you with a zero-effort solution; just click, analyze, and download all required results
• Stronger: our focus on stressed macro scenarios navigates you through challenging times

Arrange a meeting with our team!

To get an even deeper understanding of our liquidity stress testing capabilities, have a look to our other articles