Risk Management, PRMIA

Private Equity, thus , not only provides diversification benefits in the asset portfolio of Banks, they also demonstrate the similar trait
of focus on partnership rather than guaranteed return. Such investments provide huge returns or may lead to huge losses depending ion the performance of the particular venture. The rewards have gone in thes for taking the plunge into the uncertain world of private equity forgoing opportunities of guaranteed returns.Risks are certainly much higher in private equity as exemplified by the spreads in returns across the globe.

The problem is while billions of dollars have gone into Private Equity funding, valuations and risk management practices are at a nascent stage. Fair valuation of private equity investments are not easy as tons of assumptions go into the valuation processes based on diverse methods including earnings multiple, discounted cash flows from earnings, industry valuation benchmarks or using net assets.

The lack of consensus on valuation practices heightens the risks from investment in priovate equity, where Islamic Banks in the Gulf are making huge investments. Islamic investment banks , in addition, face concentration risks and often cover such risks by greater equity contributions. While risks are yet to be fully comprehended, this fast growing market provides huge opportunities and significant risks to banks of the region.