Lenders are exposed to market, credit and interest rate risk when lending money to clients. A balanced approach to managing all three is required for ensuring that the risk and reward associated with the loans is optimized.
Origination risk occurs when lending decisions are made without accurate models of future performance. Our tools allow you to model the future performance of assets based on a defined set of origination parameters. In addition to forecasting the performance of future customer relationships, we also help you understand the performance based on various economic scenarios so you can make better origination decisions.
For market risk, we use sophisticated modern financial methods to measure exposure and model solutions to hedge your risk using derivatives and other structures.
Interest rate risk can be hard to manage because forecasting interest rates and the associated yield curves is difficult. Our programs can accurately forecast these values many months into the future with more than 95% accuracy.
To manage credit risk you need to understand the behavior of the borrower throughout the time of exposure. Traditional methods only allow you to be reactive once the change in credit quality occurs. We deliver solutions that let you quickly assess the future health of borrowers so you can proactively manage your portfolio. Our solutions have the capacity to assess the health of thousands of companies on a daily basis.
When valuing a company there are many things to consider including:
Cash flow – Traditional cash flow methods are unable to identify hidden patterns in data that can dramatically alter projections. In addition, these methods are subject to error since it’s usually impossible for companies to accurately identify all of the drivers of change in cash flow. The classic example is assessing the impact of a change in tactics made without a measurement system or accurate forecast available to assess the value of the change. Our solutions use modern regression techniques and sensitivity analysis to provide a more accurate picture of future cash flows. The solutions can be at-will instead of being dependent on the normal planning cycle of the organization.
Receivables – Usually companies value receivables using only past performance in a single dimension. We leverage the concepts of cohort (group) and tenor (the period when payment flow is available) as a starting point and then leverage behavioral segmentation to create the correct number of clusters needed for analysis. Finally, we apply our forecasting models to deliver highly accurate valuations.
Inventory – We value inventory using multi-dimensional analysis of valuation and movement. We also include an assessment of the value of contractual obligations that may be expiring. By assessing inventory this way, we obtain a more complete picture of future value than methods that strive to value only the existing inventory based on past performance.
Forward contracts – The value of forward contracts is generally assessed for only the length of the legal obligation. What happens if the valuation period is longer than the forward contract? We are able to forecast the propensity of the contract being renewed and also the pricing and term changes that may occur.
Organic growth – If you’ve ever been through the annual forecasting “process,” you’ve used some sort of thorough and painful methodology to arrive at a best guess. In reality, that best guess is usually only accurate for a short period of time. The use of regression techniques and simulation allows us to discover subtle changes within your organization and provide very accurate long-term forecast. In addition, the solutions can be run at-will because they are data driven and not limited by an annual corporate process.
We believe that this approach provides a very accurate picture of a company’s value because we take a holistic and forward looking quantitative approach to valuation and use techniques that are comparable or better than those available to investment banks. It also means that the accuracy will be valid far into the future and are therefore less exposed to the inherent problems associated when building models based on assumptions and analyst bias. Finally, since we are independent advisors, we don’t have a vested interest in the outcome of valuation, but rather only in accurate results.
Based on Modern Portfolio Theory, our portfolio optimization solutions can help you manage and maximize the risk and return characteristics of your entire portfolio. Financial services companies use these techniques to manage investment portfolios and we have successfully applied this methodology in other areas such as marketing, key word buying and loan exposure management.
Specifically for financial services, we can value commercial and consumer loans, investment banking relationships, real estate holdings and other significant assets that produce a return on investment. First we model the individual asset to establish the risk/return continuum and then we combine the models to develop a solution for the entire enterprise. By taking a portfolio view, rather than a siloed approach of managing a single asset you balance your strategic portfolio while your peers race to grow individual assets without understanding the overall effect of an unbalanced revenue stream. The results, leveraged strategically, can yield a high performing financial institution with smoothed earnings.
Customer Retention, Relationship Deepening and Acquisition
Using our effective behavioral segmentation, pattern recognition and forecasting algorithms, which are designed to dramatically improve client management, can have a high impact on your revenue growth.
Many companies spend a lot of effort to gain customers, but not enough to retain them. This creates an expensive cycle of processing customers in and out the door and then finding replacement customers. Our programs can help you identify customers with the highest propensity to leave and help you uncover the drivers of their behavior. The result is higher customer retention and the ability to identify and address issues that would have caused other customers to leave in the future.
In addition to retaining customers, wouldn’t it be great if you could anticipate their financial needs and present the best solution to them as the need arises? Our programs allow you to determine a customer’s next likely need and present a solution that customers will appreciate and adopt. Not only will you benefit financially, research has shown that these customers will maintain their relationship with your organization longer if they believe that you know and anticipate their needs.
Acquiring new customers can be challenging in a highly competitive marketplace. Our solutions can help you identify prospects and target them with the best offer at the right time. Unlike traditional financial services marketing, we use a number of quantitative techniques to target customer groups with accuracy otherwise unachievable without the application of these methods. Although the theory is complex, business users are presented with a simple, easy to use interface that allows them to interpret and act on the results without the need to obtain their PhD in math, but rather by using their existing experience and skills to act on the results of our findings.