Implementation of a valuation system for the illiquid assets held within an alternative investment fund.

Abstract

Although considered as opaque and mysterious, nowadays the illiquid assets represent an investment opportunity increasingly talked about by the various different institutional investors. Indeed, it turns out that all of the assets, either financial or real, are somewhat illiquid, but what varies is their degree of illiquidity, portrayed as their liquid event occurrences. This degree of illiquidity results in a premium for the investors, making up for the higher risks taken while investing in such particular assets. Besides this concept of illiquidity and the appealing related premium, these assets are also extremely attractive because they provide, among other, higher risk-adjusted returns than the traditional assets, a reduction of the systematic-risk of a portfolio through diversification and a key noncyclical characteristic. Naturally, investing in these assets represents a massive risk and a challenge considering the fact that there is massive lack of information and the market is decentralized, without any public quotations. Therefore, the investors, mostly institutional, are active and constantly developing their knowledge of the field to take advantage of the few available information. In this context, Pure Capital S.A., an independent asset manager established in Luxembourg, desires to develop its activities and to take advantage of the illiquid assets through the development of its Management Company service. Therefore, through this project, Pure Capital S.A. will be provided with a genuine toolbox. The latter is composed of a literature and theoretical background concerning the illiquid assets, making up for the frame of the actual tools. These are, more particularly, on one hand, the Decision Tree, derived into identity sheets for each of the studied illiquid assets, gathering the major useful features for the determination of the specific illiquid asset sub-category. On the other hand, the Valuation Matrix gives, within seconds, the corresponding and recommended valuation approaches to conduct, for each of the illiquid asset sub-categories which are at stake for Pure Capital S.A. in this project. The different implemented valuation methodologies are aimed to be generical and user-friendly, to encompass as many cases as possible and enabling Pure Capital S.A. to perform effortless counter valuations. They are developed qualitatively and some, quantitatively.