CHAPTER 1
Introduction to Private Equity Operational Risk
Private equity investing is a unique asset class that can offer a number of attractive benefits to investors. Compared to more traditional investments, some of the benefits associated with private equity investing can include the ability to focus on long-term capital growth with higher uncorrelated returns. Despite these benefits, as is the case with any asset class, private equity investing is also fraught with a number of unique risk sets and challenges that investors must consider. These risks can include traditional investment-related risks such as style drift, excessive risk taking, and overall poor performance. When investing in private equity, investors are also exposed to a series of what may be thought of as risks that are not purely related to investments. These risks have become commonly grouped together under the moniker of operational risks. But what exactly is this mysterious risk category known as operational risk?
INTRODUCTION TO OPERATIONAL RISK
Noninvestment-related risks can be often grouped into different categories due to certain shared similarities. These noninvestment risks also go by many names depending on with whom you are speaking. Some may refer to these noninvestment related risks as fat-tail risks. The term fat-tail risks is used due to the severe effects that these risk may have, coupled with the perceived infrequency with which they actually cause damage. Others may use the terms business ...
