The Art of Commitment Pacing

Advanced guidance for institutional investors, academics, and researchers on how to manage a portfolio of private capital fundsThe Art of Commitment Pacing: Engineering Allocations to Private Capital provides a much-needed analysis of the issues that face investors as they incorporate closed ended-funds targeting illiquid private assets (such as private equity, private debt, infrastructure, real estate) into their portfolios. These private capital funds, once considered "alternative" and viewed as experimental, are becoming an increasingly standard component of institutional asset allocations.However, many investors still follow management approaches that remain anchored in the portfolio theory for liquid assets but that often lead to disappointing results when applied to portfolios of private capital funds where practically investors remain committed over nearly a decade.When planning for such commitments, investment managers and researchers are faced with practical questions such as: How to measure and control the real exposure to private assets? How to forecast cash-flows for commitments to private capital funds? What ranges for their returns and lifetime are realistic, and how can the investor's skill be factored in? Over which dimensions should a portfolio be diversified and how much diversification is enough? How can the impact of co-investments or secondaries be modelled? How to design pacing plans that lead to resilient and efficient portfolios? What stress scenarios should be considered and how can they be applied? These are just examples of the many questions for which answers are provided. The Art of Commitment Pacing describes established and new methodologies for building up and controlling allocations to such investments. This book offers a systematic approach for building up and controlling allocations to such investments.The Art of Commitment Pacing is a valuable addition to the libraries of investment managers, as well as portfolio and risk managers involved in institutional investment. The book will also be of interest to advanced students of finance, researchers, and other practitioners who require a detailed understanding of forecasting and portfolio management methodologies....

Auteur

THOMAS MEYER, is the co-author of Beyond the J Curve (translated into Chinese, Japanese, and Vietnamese), J Curve Exposure, Mastering Illiquidity (all by Wiley), and two CAIA books, which are required reading for Level II of the Chartered Alternative Investment Analyst ® Program. He authored Private Equity Unchained (by Palgrave MacMillan).

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PRAISE FOR THE ART OF COMMITMENT PACING "Every institutional investor should read Meyer's The Art of Commitment Pacing, the only book systematically discussing the challenges in allocating to private capital, a lumpy, illiquid, and opaque asset class. Meyer eloquently provides state-of-the-art practical solutions to help asset allocators build up and maintain allocations to private assets. This book is an essential guide to an institutional asset allocator's most important decision." --Hossein Kazemi, Ph.D., CFA, Philipp Professor of Finance at Isenberg School of Management, Editor of the Journal of Alternative Investments, and Senior Advisor to the CAIA Association and the FDP Institute "Private markets are now a staple of institutional asset allocations. As a result, fundamental questions have come to the fore that academic literature has fallen short of addressing. Thomas Meyer offers practical solutions, the perfect mix of theoretical and practical insights, in a series of synthetic and accessible chapters for knowledgeable practitioners. This is well-invested time that will pay off over the long term." --Cyril Demaria, Head of Private Market Strategy at Julius Bär, Affiliate Professor at EDHEC, Author of Asset Allocation and Private Markets, and Introduction to Private Equity, Debt and Real Assets "This book is a game-changer for investors in private capital, offering unprecedented insights and practical models to master commitment pacing and risk management." --Jason Scharfman, Managing Partner Corgentum Consulting. "Thomas has condensed the art and science of commitment pacing into a rigorous yet pragmatic guide, filling a huge gap in the finance literature - a must read for all LPs." --Andrea Carnelli Dompé, PhD. CEO & Co-founder - Tamarix Technologies "Commitment pacing is one of the hidden gems in the toolbox of every private equity fund manager. Historically it has lagged in terms of research and literature focus versus fund manager selection or due diligence. Thomas Meyer levels the playing field by focusing on this often overlooked subject. If you want to move from simplistic commitment pacing models to rigorous forecasting in a portfolio of private equity funds, this is a book for you." --Ignacio Larrú Martínez, General Partner at Kanoar Ventures SGEIC, SA "With the growing allocation to private equity by Japanese institutional investors, The Art of Commitment Pacing provides a very useful weapon for them to build a sophisticated investment program. We live in a volatile investment environment and managing a private equity portfolio that lacks liquidity is not an easy task. This book helps investors to overcome their challenges." --Kazushige Kobayashi, Managing Director, MCP Asset Management "Thomas Meyer delves into the critical risk associated with Private Capital: its inherent illiquidity. Expanding on the concepts introduced in his previous best-selling works, Thomas offers an in-depth exploration of this risk. He provides essential strategies, including commitment pacing, to safeguard institutional investors against potential significant upheavals. This book is an indispensable guide for every investor in private capital looking to optimize their success." --Pierre-Yves Mathonet, Former Head of Risk, Private Equities Department, Abu Dhabi Investment Authority and former Head of Division, Risk Management, Private Equity, European Investment Fund

Contenu

Acknowledgments xiii

Chapter 1 Introduction 1

Scope of the book 1

Quick glossary 2

The challenge of private capital 2

Risk and uncertainty 3

Why do we need commitment pacing? 4

Illiquidity 4

The siren song of the secondary market 4

How does commitment pacing work? 5

Significant allocations needed 7

Multi asset class allocations 8

Inträasset class diversification 8

Engineering a resilient portfolio 9

Organisation of the book 10

Chapter 2 Institutional Investing in Private Capital 15

Limited partnerships 15

Structure 16

Criticism 18

Costs of intermediation 18

Inefficient fund raising 18

Addressing uncertainty 19

Conclusion 19

Chapter 3 Exposure 21

Exposure definition 21

Layers of investment 23

Net asset value 23

Undrawn commitments 24

Commitment risk 24

Timing 24

Classification 25

Exposure measures - LP's perspective 25

Commitment 26

Commitment minus capital repaid 26

Repayment age adjusted commitment 27

Exposure measures - fund manager's perspective 28

Ipev Nav 28

IPEV NAV plus uncalled commitments 29

Repayment age adjusted accumulated contributions 30

Summary and conclusion 31

Chapter 4 Forecasting Models 37

Bootstrapping 37

Machine learning 38

Takahashi-Alexander model 40

Model dynamics 40

Strengths and weaknesses 46

Variations and extensions 47

Stochastic models 49

Stochastic modelling of contributions, distributions, and NAVs 49

Comparison 50

Conclusion 51

Chapter 5 Private Market Data 53

Fund peer groups 53

Organisation of benchmarking data 53

Bailey criteria 54

Data providers 55

Business model 55

Public route 55

Voluntary provision 56

Problem areas 56

Biases 57

Survivorship bias 57

Survivorship bias in private markets 58

Impact 58

Conclusion 59

**Chapter 6 Augm…