Risk measurement methodology development for a credit FIA
Asset management company with 8 billion in real estate and securities assets under management
The Risk Management Function requested the support of MACFIN to design and implement the risk management framework of an Alternative Investment Fund (AIF) aimed at the purchase of notes of a securitization vehicle to which a multi-originator loan portfolio with underlying real estate classified among probable defaults (so-called “UtP – Unlikely to Pay”) was contributed.
Goals
Define a risk measurement methodology
for credit FIAs with underlying real estate
Support the RM Function
in interlocuting with business structures and other stakeholders (e.g., servicer) to define the functional information set for conducting analyses
Design
of the reporting system toward toward corporate bodies
Activity
Acquisition and analysis
of available information on the characteristics/profile of the Investment Fund and the exposures being invested in (technical form, status of the real estate initiative, collateral, size of investments, any pending recovery actions)
Identification of risk indicators
for each applicable risk class and definition of methodologies for calculation/valuation of these indicators
Setting up a scoring model
to be applied to positions based on the values assigned to individual indicators, aimed at associating each exposure with a risk class
Definition of stress levels
on expected cash flows for each position according to the assigned risk class and recalculation of IRR
Implementation of a tool
for collecting the necessary information for indicator enhancement, score and risk class calculation, stress application and IRR recalculation
Design of reporting
and initial feeding for Corporate Bodies
Results
Release of a tool
for conducting follow-up surveys independently (still in use after more than 4 years)
To foster an integrated view of the risks
(in TOP-DOWN logic) of the AIF and the effects on expected profitability by comparing basic IRR and IRR@risk
Optimization of the risk reporting process
with considerable reduction in reporting production time and exposure to operational risks (i.e., material errors, duplication of databases)
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