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