Investment reporting has always focused on returns. Because of this, there's a critical blind spot: risk. When money is flowing, the investment industry tends to look the other way on risk. Returns are easy for humans to understand – risk is difficult. However, pressure is growing for firms to better understand and communicate the risks in their portfolios. 

To address these issues is Kathleen Keenan , who is chief product officer at Confluence . The editors are pleased to share these views; the usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Kathleen Keenan

The opaque nature of private companies and funds creates significant hurdles for risk assessment. While managers routinely provide key performance metrics, they understandably limit the extent to which they divulge their underlying holdings. 

In an industry characterised by asymmetric information, protecting that competitive advantage is essential. Nonetheless, this secrecy forces investors to rely on imperfect substitutes and suboptimal risk insight. 

Those representing the interests of investors are pushing for greater disclosure, and it seems inevitable that reform is coming. The pace of this reform will depend on the evolving power dynamics between managers and their investors, and the industry’s ability to innovate to ultimately deliver disclosure without hampering market competition. One thing is certain; with private equity now representing large portions of many institutional portfolios, the stakes for accurate risk assessment have never been higher.

Limitations of performance measures
Traditional metrics such as internal rate of return , multiple on invested capital and distributions to paid-in capital offer useful insights into the performance of private assets. But these figures are inherently limited in their ability to recreate the granular transparency provided in public markets.

Crucially, these metrics focus on returns, not risk. Many investors are broadly satisfied when it comes to measuring the short- and long-term performance of these private assets. The gap lies in risk metrics, where there is very little transparency into underlying holdings. Lacking alternatives, investors turn to proxy measures – using public indexes as stand-ins for private assets.

While the maths have improved, it remains a blunt instrument. Structural differences between public and private entities, coupled with the lack of detailed data on private assets, inevitably lead to misestimations and assumptions that fall short of a comprehensive risk assessment.

Worse still, risk estimates for private assets based on calculations for liquid assets could significantly underestimate the true risk. In his 1991 research paper,  MIT economist David Geltner revised the standard volatility formula to overcome the artificially low volatility attributed to illiquid securities, caused by infrequent valuations. This increased risk estimates for illiquid assets by as much as 300 per cent, hinting at the potential importance of reform.  

The opportunity for transparency
There is a massive opportunity associated with addressing these measurement challenges to support investor onboarding and continued growth, and the industry can look to public markets for inspiration. After all, the risk insight we now consider table stakes for equities was not always available. 

It took a systemic push – led by several large financial organizations – followed by years of gradual reform – for metrics such as option pricing, volatility analysis, and multi-asset Value at Risk to become common.

When proactive and forward-thinking hedge funds pushed for greater transparency 20 years ago, it represented a competitive differentiator for those early adopters, letting them grow faster than their still-opaque competitors. There is every likelihood that the same will be true for private funds. 

The challenge is to do this without divulging proprietary data, and this is where third-party firms can bridge the gap. Independent analytics providers can serve as intermediaries, receiving granular data covered by strict contractual confidentiality. These third parties then deliver aggregated transparency to investors without revealing the underlying highly protected details. 

The development of operating models like this would allow private markets to move beyond crude proxies to embrace sophisticated market analysis – gaining a deeper understanding of the risks they take, supporting informed investment decision-making and greater confidence in the asset class.

Evolving power dynamics
The pace of change in private asset risk modelling is closely linked to the evolving relationship between fund managers, their investors and regulators. Limited partners have been vocal advocates for transparency, recognising its crucial role in effective risk management and due diligence.

While private equity was once a fringe allocation, it now commands a central role in institutional strategy; modern public pension funds typically allocate between 10 per cent and 15 per cent to the asset class, while some aggressive sovereign wealth and endowment portfolios have seen their total alternatives exposure climb toward 40 per cent or more.

With such substantial exposure, investors naturally require a more sophisticated risk assessment process, creating pressure for funds to provide greater transparency or risk losing to a competitor that does. 

While tightening regulatory frameworks – ranging from SEC rulings in the US to the maturing AIFMD and SFDR mandates in Europe – suggest a more constrained environment, the industry's own innovation will likely drive the most meaningful progress in the near term.

In recent years, we’ve seen dozens of headlines declaring a "golden age" for private markets. But this expansion really hinges on whether managers can resolve the challenges associated with risk measurement. The industry has consistently demonstrated its capacity for innovation, and its ability to balance protection with disclosure will ultimately build the foundation of trust which is essential for the next phase of market growth.
 

Footnote:

1, Geltner, D. M. . Smoothing in appraisal-based returns. The Journal of Real Estate Finance and Economics, 4, 327–345

About the author
As CPO at Confluence, Kathleen Keenan shapes the company’s product vision and leads the compliance, regulatory and reporting, analytics, global data services and marketing divisions. 

Keenan joined Confluence in January 2025. A 20-year industry veteran, she was previously vice president of product management for investor communication services at Broadridge, guiding portfolio strategy and global platform modernization. Earlier, she led product strategy at GAGNONtax and BISAM, steering the growth of platforms trusted by top global asset management firms. Her career also includes senior product roles at Thomson Reuters and Nasdaq.

About the firm
Confluence provides performance, risk and attribution analytics to asset managers, wealth advisors and institutional investors globally. Its analytics platform processes data for firms managing trillions in assets.