Long-Run Management of Private Equity Investment

Abstract

The authors present a stochastic simulation model that projects cash flows (capital calls and distributions) as well as unfunded commitment levels for private equity allocations over time. Their contribution links the underlying dynamics in the targeted private equity allocation to movements in the underlying portfolio while managing liquidity and rebalancing risks. Importantly, their model allows investors to assess the impact of changing the pace of annual commitment and of varying assumptions regarding capital calls, distributions, and underlying returns. Their model also offers insights into more-efficient approaches to building up an allocation to private equity strategies over time. TOPICS: Private equity, simulations, portfolio construction