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Cash flow simulation and model comparison in private credit

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Title: Cash flow simulation and model comparison in private credit
Author(s): Virtanen, Jussi
Contributor: University of Helsinki, Faculty of Science
Degree program: Master 's Programme in Mathematics and Statistics
Specialisation: Statistics
Language: English
Acceptance year: 2022
Abstract:
In the thesis we assess the ability of two different models to predict cash flows in private credit investment funds. Models are a stochastic type and a deterministic type which makes them quite different. The data that has been obtained for the analysis is divided in three subsamples. These subsamples are mature funds, liquidated funds and all funds. The data consists of 62 funds, subsample of mature funds 36 and subsample of liquidated funds 17 funds. Both of our models will be fitted for all subsamples. Parameters of the models are estimated with different techniques. The parameters of the Stochastic model are estimated with the conditional least squares method. The parameters of the Yale model are estimated with the numerical methods. After the estimation of the parameters, the values are explained in detail and their effect on the cash flows are investigated. This helps to understand what properties of the cash flows the models are able to capture. In addition, we assess to both models' ability to predict cash flows in the future. This is done by using the coefficient of determination, QQ-plots and comparison of predicted and observed cumulated cash flows. By using the coefficient of determination we try to explain how well the models explain the variation around the residuals of the observed and predicted values. With QQ-plots we try to determine if the values produced of the process follow the normal distribution. Finally, with the cumulated cash flows of contributions and distributions we try to determine if models are able to predict the cumulated committed capital and returns of the fund in a form of distributions. The results show that the Stochastic model performs better in its prediction of contributions and distributions. However, this is not the case for all the subsamples. The Yale model seems to do better in cumulated contributions of the subsample of the mature funds. Although, the flexibility of the Stochastic model is more suitable for different types of cash flows and subsamples. Therefore, it is suggested that the Stochastic model should be the model to be used in prediction and modelling of the private credit funds. It is harder to implement than the Yale model but it does provide more accurate results in its prediction.
Keyword(s): private credit fund model comparison cash flow simulation Stochastic model Yale model


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