Three Portfolio Modeling Scenarios that GPs should be prepared to share with LPs

by Andrés Ramos, Content Marketing Specialist – eVestment Private Markets

While investors rode out the market volatility and economic disruptions seen over the course of 2020, challenges remain for private fund managers as we move into the new year. The COVID-19 pandemic continues to affect global societies and economies with few signs of abating and new Democratic leadership in the executive and legislative branches of the United States will likely mean changes in economic and social policy that could impact GP portfolio companies.

Fund managers are no strangers to financial modeling as a means of evaluating potential investments but where they should focus more attention in 2021 is on modeling that can show LPs and prospective investors how different factors in today’s markets can affect portfolio values.

With countless variables affecting valuations, institutional investors have developed an insatiable need for information on how their portfolios have been affected. Likewise, institutional investors looking to make new investments will be eager to see that their prospective fund managers have planned for all possible outcomes.

Portfolio modeling helps GPs keep all their bases covered in terms of how they’re addressing investor uncertainty and prospective client questions around their portfolios.

Three scenarios where GPs can leverage portfolio modeling to address questions about portfolio valuations.

1) Duration-based

As of the time of writing, it has been approximately one year since the COVID-19 pandemic began affecting the United States and Europe. While distribution of vaccines has begun, there is no clear estimation on when the pandemic will truly subside and life can return to normal. Fund managers know what the financial implications are of each additional month or quarter of closed economies and lockdowns on their valuations. They can use this knowledge to model out the long-term valuation impacts to show investors how resilient, or not, their portfolio is.

2) Incremental change valuation impact

A common method for assessing and forecasting the health of an overall economy or specific sector is with measures of percent growth or contraction. GPs will understand how metrics like GDP growth or decreased consumer spending will affect their portfolio companies and can model valuation changes based on these signals.

3) Binary outcome or event driven valuation impact

Events like the possible passage of new legislation, or the outcome of an election have only one of two outcomes. Fund managers will know and understand the implications of either outcome and can use modeling to understand the potential impacts of each on their portfolio.

Taking portfolio modeling from the portfolio company-level to the total portfolio-level

While modeling at the portfolio company-level is no problem for portfolio managers, many struggle with rolling up those predictions to the fund or total portfolio-level to understand how the valuation changes are affecting overall IRR and TVPI.

Fund managers leveraging disconnected spreadsheets to handle portfolio modeling calculations and IRR and TVPI calculations will likely struggle in reconciling the two and delivering the results in a comprehensible way to LPs or potential investors.

Portfolio Modeling with future-dated track records in TopQ

One way that users of eVestment’s TopQ are overcoming this challenge is by uploading future-dated track records to the platform. This allows them to apply the analytic power of TopQ to the predicted valuation changes they have modeled for their portfolio companies. TopQ can ingest various iterations of the same track record allowing clients to create high, low, and base case scenarios for their funds or total portfolios. Fund managers with this level of insight into potential impacts on their portfolios are in turn better prepared to address questions from their investors about the state of the fund and how portfolios are being affected.

This short clip highlights how TopQ ingests a future-dated track record and how a client can then compare one scenario to another.

Portfolio modeling, return projections, and more

Portfolio modeling and future-dated track records are just a few of the many tools in TopQ that help fund managers understand and report on their performance.
Watch our webinar “Moving Beyond Excel” to learn more about the platform and how it is helping GPs leverage the power of their performance data. 

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