Home > Insights > Cash for Calls: A Quantitative Approach to Managing Liquidity for Capital Calls

Investors in private assets typically must commit their funds to an asset manager. It is only after those funds are called at some unknown later date that investors receive exposure to the desired assets. We review data on calls and distributions for private equity and private debt funds over the past 30 years. We characterize the speed of calls and distributions for each asset, the impact the call speed (or lack thereof) has on investors’ realized return on their committed capital, and the extent to which this call risk can be diversified across managers. Finally, we use the historical call data to illustrate “liquidity tiering,” an asset allocation strategy that helps investors manage against their future commitments. 

KEY FINDINGS

Studies of private market investments tend to focus on the return premium associated with illiquid assets and their appeal relative to traditional public market assets. Far less attention is paid to the need for investors in these assets to earmark liquid funds for the capital calls endemic to private market investing—and, importantly, the resulting drag on total returns.

Solving for the liquid allocation to complement a pending private market investment can be challenging. The speed and magnitude of realized calls are likely to be correlated—sometimes highly correlated—with financial market movements.

We review historical private fund call behavior to evaluate the effectiveness of various liquidity solutions or cash management strategies. The average investor in private funds must manage uncalled capital for several years.

“Liquidity tiering” has the potential to provide investors with additional returns relative to cash, with less risk than equivalent assets in public markets.

This abstract has been provided by the Journal of Alternative Investments. © 2022 PMR. All rights reserved.
The Author

Jerome M. Schneider

Portfolio Manager

Sean Klein

Head of Client Business Strategy – Client Solutions and Analytics

Wade Sias

Strategist

Simon Fan

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This paper includes hypothetical assumptions and scenarios. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

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CMR2023-0203-2721203