Private markets commitment pacing and cash flow modeling
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The uncertain pattern of private market investment cash flows poses an implementation challenge for investors with liquidity and risk management constraints. To ensure targets are reliably achieved and maintained over time, forecasting private markets cash flow patterns is critical to implementation of the strategic asset allocation process. Institutional investors in search of improved returns and greater diversification often turn to private market investments. Based on their liquidity, risk tolerance and performance needs, investors strive to develop appropriate target allocations to the asset class. Unlike traditional asset classes where capital is put to work immediately, private market investors make upfront commitments to funds that are drawn over time at a highly variable rate. Having no control over the timing of either contributions toward commitments or distributions from realizations of investments makes estimating future exposure of private market investments difficult.
