Quantify Risk Reward (Private Eq)
I guess this question can be posed from the perspective of owning any security. I am hoping to learn how can one go about quantifying the risk with an investment in order to more accurately calculated the adjusted reward-risk ratio. Let me start off with a couple of examples:
I am looking for an investment in EM. My projected IRR is 25% and assume that the fx depreciation risk, which for simplicity purposes is the only risk, is 15%. This means my effective IRR is 10%
In another case, let's say projected IRR is again 25, but this time customer concentration is the only risk - top 5 customers make up 80% of revenues.
How can I quantify this risk (customer concentration) and other such type of
Risks (bad infra, Corp governance, high competition, poor industry growth forecast, lack of substantial competitive moat etc) in my investment memo analysis to better estimated the adjusted IRR Of the opportunity.
I think doing such analysis will help me better compare opportunities across markets, sectors.
I am interested in hearing how people look at this. I think there needs to be More analysis than just saying because this opportunity has many risks, I will therefore look for an irr or 30-40%