Page 90 - Annual Report 2010

ANNUAL REPORT 2010

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3.5.2 Liquidity risk

The liquidity risk is closely related to the Fund’s solvency and to the confidence that creditors have in the Fund to meet its commitments. The treasury is managed in such a way as to protect the value of the paid-in capital, ensure an adequate level of liquidity to meet possible guaran-tee calls, PE commitments and administrative expenditure and earn a reasonable return on assets invested with due regard to the minimisation of risk (for further details on market risk for treasury, please refers to note 3.5.3.1.C).

3.5.2.A. Private Equity

The PE market is illiquid by nature as the vehicles are closed-end funds typically with a 10-year lifespan. Af-ter the first closing, it is difficult for an investor to offload their position, needing to find a buyer in the secondary market. However, PE funds have a finite life and are self-

EUR

Private Equity Not more than

3 months

3 months to 1 year

1 year to 5 years

More than 5 years

As of 31.12.2010 5 603 117 3 810 771 10 994 729 149 555 041 As of 31.12.2009 2 340 308 3 030 571 11 588 657 130 413 035

EUR

Guarantees Not more than

3 months

3 months to 1 year

1 year to 5 years

More than 5 years

As of 31.12.2010 142 300 863 140 122 579 123 651 246 42 999 690 As of 31.12.2009 91 403 807 78 946 143 65 474 796 10 612 275

liquidating. This results in a continuous stream of reflows, the magnitude of which mostly depends on the market conditions and the proportion of the portfolio that is in its divestment phase.

The total net commitments to PE funds amounting to EUR 388.9m in 2010 are limited to 50% of shareholders’ equity. EIF’s portfolio is diversified in terms of vintage years, which has a smoothing effect on its cash flows (see EIF’s own resource por t folio broken down by vintage year in note 3.2.3).

The table below shows the Fund’s PE undrawn amounts (commitments minus disbursements and excluding equali-sation fees) of EUR 169.9m classified into relevant ma-turity groupings based on the remaining period to the expected maturity date. It is presented using a prudent expectation of maturity dates.

3.5.2.B. Portfolio Guarantees & Securitisation

The nature of EIF’s capital structure and the capital charge limits defined in the EIF Credit Risk Policy Guidelines en-sure a high degree of liquidity to cover unexpected losses arising from the G&S activity.

At year end 2010, the total Fund’s G&S exposure at risk amounted to EUR 2 580.2m. However, for liquidity risk management purpose, G&S exposure at risk is analysed with reference to its expected maturity date and per the total expected loss.

At the year end 2010, the total expected losses for al l G&S own r isk t ransact ions stood at EUR 142.3m.

The expected losses may materialise anytime until the tran­ ches’ expected maturity dates. However, EIF does not expect to receive guarantee calls for the amount of EUR 142.3m within the next 3 months as most of the G&S transactions follow a debt service guarantee framework, meaning the guarantee covers timely payment of interest and ultimate (i.e. at the legal maturity date) payment of principal. It is not uncommon to have legal maturity dates for these instruments set 20 – 30 years after the expected maturity dates.

Within the next 3 months tranches with a sum of expected losses of EUR 2.2m will reach their expected maturity dates. Therefore, repayments of tranches will decrease the total expected losses of the current outstanding G&S own risk portfolio.