How much maths is needed in private equity (also when compared to hedge funds or investment banking, for example)?
@CAIA_Blog
@CAIA_Blog
Private Equity requires a good understanding of Finance and especially sector-specific finance such as Real Estate Finance Investments and so on.
In my opinion, the techniques used to model PE transactions have a lot in common with those that are applied to Listed Equity.
In my opinion, the techniques used to model PE transactions have a lot in common with those that are applied to Listed Equity.
Private Equity like other areas in Finance needs some maths in it, but nothing akin to Financial Engineering or Quantitative Finance, etc.
Unless you are doing financial risk management assignments, which means you will be applying the standard tools that are used elsewhere.
Unless you are doing financial risk management assignments, which means you will be applying the standard tools that are used elsewhere.
For e.g. VaR ( translates into ICAR - Invested capital at risk in the PE Industry). But do note: that PE data is not easily available.
Thomson Reuters CSF had a database that was normally used by SWFs - Sovereign Wealth Funds and other Islamic Banks that invest big time
Thomson Reuters CSF had a database that was normally used by SWFs - Sovereign Wealth Funds and other Islamic Banks that invest big time
PE/VC Investing is done big time across the GCC! Vintage samples are available, but vintage year selection for computing Relative VaR and attribution analytics is a decision left to the Investment / Risk Analyst.
Free-cash flow modelling and other DCF Methods are commonly used to price transactions and buy-side deals. Computing IRR - internal rate of return, modified IRR & Adjusted IRR alongside the two essentials for every deal are the Entry and Exit Multiples.
PE - Portfolio Management can be done using either the Top Down or Bottom-up Methodologies!
Quite similar to what grads do after studying portfolio and investment management modules.
Quite similar to what grads do after studying portfolio and investment management modules.
Analysis of private equity deal flows and judging their quality is more of an art!
You need to have the right kind of sector-specific knowledge and/or industry-oriented experience before you can make an investment authorization.
You need to have the right kind of sector-specific knowledge and/or industry-oriented experience before you can make an investment authorization.
Your legal and due diligence skill sets should also be strong!
But the kind of Maths you find in derivatives and structured products is not usually applied in the PE Industry by Industry Participants and experts.
But the kind of Maths you find in derivatives and structured products is not usually applied in the PE Industry by Industry Participants and experts.
All in all, the #PE and VC Investment Industry Space is more dominated by Accountants and Corporate Finance Experts and their language of communication.
Hence, Mathematical Finance, Econometrics and Econophysics Methodologies are not used very frequently by applied practitioners.
Hence, Mathematical Finance, Econometrics and Econophysics Methodologies are not used very frequently by applied practitioners.
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