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Staying invested

There is a little secret in private asset investing that amateurs do not seem to fully appreciate. The challenge in private assets is not about getting your money back. Actually, the challenge is about staying invested as you will indeed get your money back unlike any traditional asset class, where you can stay fully invested ad infinitum1.

Private investment exposures are driven by commitments, actual drawdowns, and underlying fund performance. As investors just control the size and timing of their commitments, they need to carefully consider what commitment strategy best serves their strategic purposes and is best aligned with their risk profile.

To explore the challenges of staying invested in private assets, let us take a look at the dynamics of a private equity fund, as we discuss in our paper Targeting Private Equity2:
  1. This represents a base case based on the experience of AltamarCAM Partners. It is not an investment recommendation, and past performance is no guarantee of future returns.
  2. Further details can be found in page 35 under “Commitment Strategies”.

The Single Buyout Fund

Source: AltamarCAM Partners based on Preqin data

In a typical fund3, investors will disburse about 60% of committed capital during the first four years, net of fund distributions of about 20%. In about year 5, investors will start seeing net cash coming into their pockets for about the next ten years. The NAV will keep increasing until it reaches about 80% of committed capital, sometime in years 5 to 6. It will then steadily decline. Over the first 10 years, the NAV will roughly average 54% of committed capital. From this observation, naïve investors may end up committing 200% of their desired exposure. Nevertheless, at the end of the 15 years, the NAV will still have faded all the way to zero and, in between, it may have reached 160% of the committed capital, potentially exceeding desired exposures. The dynamics for other asset classes are quite similar and so is for funds of funds with just longer investment and divestment periods. So, how can we stay invested? Well, you need to design a commitment strategy. In our paper Targeting Private Equity we go about exploring commitment strategies. On the back of historical data, we test four strategies of committing initially just €100MM and committing €100MM every one, two, and three years. We run numbers from the point of view of the investor, not the fund, and use actual nominal values:

3. Base scenario elaborated on the experience of AltamarCAM Partners. This may not be realised in the future.

Commitment Strategy with Single Funds – 25% each quartile

Source: AltamarCAM Partners

 

Investors may reach a target steady-state self-financing exposure by committing to invest, in round numbers, one sixth of the target exposure every year, one third every two years, or one half every three years.

As the last three strategies involve staggered investments, the desired exposure takes longer to build than by just committing the target amount at the outset, as in the previous example. However, once the target exposure is achieved with the three staggered commitment strategies, investors obtain annual positive net cash flows as long as the commitment strategy is maintained:

Commitment Strategy with Single Funds – Net Cash Flows

Source: AltamarCAM Partners

There are no shortcuts to building sustainable exposures in private assets. You need forethought and time to execute a staggered commitment strategy consistent with your unique portfolio goals and constraints.

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