A Portfolio Management Approach to Determining Private Equity Commitments

Abstract

Unlike with traditional asset classes, reaching and maintaining an asset allocation target for private equity is not straightforward. Commitments must be made to new funds as mature funds make distributions and ultimately wind down. In this article, we describe a strategy that directly links the commitment decision to the investor's asset allocation policy. Commitments are adjusted systematically to reflect past investment performance, minimizing the differences between the actual private equity allocation and its target. Furthermore, the private equity allocation reaches its target more quickly with this method than with other methods for setting commitments.