FinTech platform offers greater clarity on PE beta risk

A new platform created by CEPRES calculates the beta risk of individual private equity investments to help investors balance their portfolios.

Private equity benchmarking and analysis group CEPRES has developed a new platform to calculate the beta risk of private equity markets.

The PE.Analyzer is an online platform designed for fund managers, institutional investors, and risk and strategy professionals, implementing “leading scientific portfolio theory as a practical SaaS solution”, according to a statement from CEPRES.

The software calculates the individual beta of a private equity investment — indicating whether it is more or less volatile than public markets — thereby demonstrating to what extent an individual investment’s performance is tied to public market performance. This provides a basis for the platform to calculate risk-adjusted alpha.

“For the first time it is possible to evaluate the true risk/return profile of private equity compared to specific markets and underwrite investment decision on an evidential basis,” CEPRES said in the statement.

The software can be used by limited partners to analyse the track record of an individual manager as part of due diligence, and to analyse specific strategies, such as buyouts, and sectors, such as healthcare or the automotive industry.

For fund managers, the software offers deeper insights on their performance and risk correlations, which aids in forecasting investment outcomes and underwriting investment decisions, CEPRES said.

“With current global markets at their most volatile in years, beta risk outweighs alpha generation as an influencer of final investment outcomes,” CEPRES chief executive officer Dr. Daniel Schmidt said in the statement.

“Previous analysis of alpha assumed a beta correlation of 1 for private equity, which research proves is incorrect. Without the beta analysis we introduced today, an investor could make false assumptions resulting in unexpected losses – as happened for many investors in private equity during the 2008 credit crisis.”

CEPRES research had discovered that buyouts typically exhibit beta between 1 and 2.5, while private debt typically exhibits beta between -0.5 and 1. PE.Analyzer can help investors to construct a balanced portfolio.