Estimating Rate Sensitivity for Illiquid Private Assets

Summary

The document asks how to measure the effect of a parallel interest-rate shift on quarterly valued, illiquid investments such as private real estate, infrastructure, and private equity. It identifies practical complications: limited observations, smoothed reported returns, and the fact that rates can affect both asset income and the discount rate used in valuation.

A brief answer suggests treating income-producing real estate or infrastructure like a bond: discount periodic cash flows using a reference rate curve plus a credit spread, calibrate the spread so the model matches an estimated market price, and then calculate sensitivities from the resulting valuation. This supplies a modeling framework rather than an empirical study or detailed procedure. Its usefulness depends on obtaining a credible market price and defensible cash-flow and spread assumptions; it does not explain how to handle return smoothing, private equity, or the simultaneous effects of rates on operating income and discount rates.

Key ideas

• Income-producing private real estate or infrastructure can be approximated as a bond for valuation purposes.
• A reference yield curve and a credit spread can be used to discount projected cash flows.
• The spread can be calibrated by matching the model value to an estimated market price.
• Rate sensitivity calculations depend on the quality of the price estimate and underlying cash-flow assumptions.

Tags

# Measuring interest rate sensitivity for illiquid private investments?


# Measuring interest rate sensitivity for illiquid private investments?












There seems to be surprisingly little literature on this topic. If you had a portfolio consisting of an unlisted illiquid private asset class (eg private real estate, direct infrastructure or private equity), valued quarterly, how would you measure its sensitivity to a parallel shift in interest rates?

There are unique obstacles with these asset classes, such as lack of data/smoothed returns, flow-through from the interest rate to the discount rate, impact on income stream, etc.

Does anyone have any experience in this field? Could you point out any good references or papers?

## Answer by Dora (score 2)

https://quant.stackexchange.com/a/38885

When you invest on private real estate or infrastructure, it pays you coupons periodically. So you can treat them as a bond. You can use a credit spread plus libor curve for discounting. the credit spread can be solved by matching the model price to market price. Here the trader needs to estimate a market price for the asset. After than, computing sensitivities are straightforward.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.