Reconciling Limited Partners’ Cash-Flow Forecasting with the Look-Through for AIFs

Abstract

This article aims to deal with two problems: (1) how to formally comply with the look-through requirement under various financial regulations and (2) how to address biases in financial reporting for Alternative Investment Funds (AIFs) investing in private equity and real assets. The approach suggested here aims to work within the confines of existing regulation and with the reporting data provided by the fund management industry already today. It aims to incorporate insights on portfolio companies gained by a look-through into a model of the fund’s cash-flows. Compared to traditional approaches based on historically observed cash-flows for comparable funds, such a look-through can increase the reliability of cash-flow projections and result in a better attribution of risk factors to the individual portfolio components. For this purpose, the author differentiates between a simple, enhanced, strong, and full look-through.