Building and Maintaining a Desired Exposure to Private Markets: Commitment Pacing, Cash Flow Modeling, and Beyond

Abstract

Unlike public markets, private market holdings are a class of self-liquidating assets. Consequently, there is no passive strategy, e.g., buy-and-hold, to invest in private markets. All investments require an active management. In order to build and maintain a desired allocation to private markets one needs a commitment pacing plan that balances several objectives including stable exposure, performance, cash flow management, diversification over funds and time, and maintaining relationships with GPs.

A good commitment pacing plan is often seen as the lynchpin of a private capital program and can account for much of the dispersion in performance across LPs. We present a simulation-based framework to show the tradeoff between the steady-state NAV and the speed with which it can be built using a simple, yet powerful, commitment strategy and a popular cash flow model. Our framework also reveals the tradeoff between liquidity and risk-adjusted performance assuming the existence of private market premium in US buyout investments.