A commitment strategy for illiquid assets involves interactions among a number of different factors. The key variables include: 1) the expected return patterns, 2) the pace of takedowns (i.e., capital calls), 3) the rate of distributions, and 4) the projected net spending or inflows.
This study employs sensitivity analyses over a 3-year horizon to focus on 1) the impact of different equity markets for a fixed set of parameter values, 2) the combined effect when a parameter takes on an equity-sensitive value, and finally 3) a multiple sensitivity analysis that integrates market-driven changes in the key parameters.
Return differences between the liquid and illiquid pools turn out to have a surprisingly little impact. Similarly, variations in spending levels have a noticeable effect, but not an overriding one.
The two dominant factors are distributions and takedowns, which can either offset or reinforce one another, depending on the market environment. In weak equity markets, distributions tend to dry up. However, with limited financing and remote IPO prospects, these lower distributions may be offset by lower takedowns.
On the other hand, weak markets can also abound with irresistible “bargain” opportunities, sparking more aggressive takedowns that, together with lower distributions, could lead to a perfect storm of worst-case illiquidity surges. Ironically, these takedowns may cause liquidity problems for investors even as they benefit from the exceptional returns. It should be pointed out that in spite of the liquidity problems experienced in 2008-2009, the liquidity strain would be far more severe in this worst-case situation with its “bargain-level” takedowns. FULL REPORT HERE
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