The PERACS Risk Curve: How to capture a full risk profile of your GP

Many of the approaches to calculating the risk in a private equity private equity portfolio are overly simplistic.  Simple loss ratios only provide a small snapshot on downside risk but do not capture a full picture of how a private equity creates value and where a firm’s inherent risk is hidden.

PERACS Risk Curve graphically and numerically captures the relevant components of risk in private equity by measuring the distribution of relative performance across all investments made by a GP. By drawing on a well-established methodology used by macroeconomists the PERACS Risk Curve is computationally simple, yet intuitively powerful.

PERACS Risk Curve compares the cumulative profits generated by a certain sub-set of the portfolio to the size of this sub-set. In other words, it measures to what extent the worst 20 percent of all deals are responsible for contributing less than 20 percent of all profits.

PERACS Risk Coefficient, which is a refinement of the Gini coefficient, is a means to quantify the PERACS Risk Curve. The PERACS Risk Coefficient is based on the ratio of the area under the line defining perfect equality and the area under a given PERACS Risk Curve.

Click here to find out more about the PERACS Risk Curve.

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