Skip to content
Contact us
 

How technology can help investment managers effectively pace commitments & manage cashflow in alternative investments

Dan author banner

This is the third paper in our series on how technology can help investment managers unlock the opportunities in alternative assets. In the last two instalments we discussed why investment managers should consider including alternative investments in multi-asset class portfolios, and how much and which alternatives are best suited to meet client needs.  

Considering the next critical challenge, this article will discuss how to allocate capital to alternative investments to ensure long term allocation goals are met. Primarily, commitment pacing and optimal cash flow management is required to achieve and maintain target allocations to the desired alternative investment classes. 

The illiquid nature of alternative investments

Alternative investments, such as private equity, venture capital and private credit typically require investors to make commitments to co-mingled vehicles as opposed to acquiring assets directly. Unlike traditional investments that offer immediate liquidity, these assets involve committing capital that will be drawn down by the fund manager over time as investment opportunities arise. Once invested, the capital remains illiquid and eventually self-liquidates as the investments mature and return capital to investors.

Because of these characteristics, portfolio exposures to alternative assets are built gradually, requiring investment managers to carefully plan commitment activities over multiple years. This methodical approach ensures a steady build-up of exposure while avoiding over-concentration in any single vintage year.

Challenges of commitment pacing

After determining the target allocation of each asset class, investment managers face the task of actively working toward those targets with committed capital. While there may be clear targets, managers should consider several challenges when pacing commitments:

Set a clear commitment plan

Achieving the target allocation quickly may seem desirable, but it can lead to over-concentration in specific vintage years, increasing the risk of poor returns if market conditions deteriorate. Conversely, spreading commitments too thinly over time may delay reaching the target allocation, potentially missing out on market opportunities. By balancing speed and diversification, managers may define a commitment schedule that aligns with the long term portfolio's goals and fits the scope of the capital and current allocation of the existing portfolio.

Navigate illiquidity

Alternative investments’ illiquid nature requires managers to anticipate future cash flow needs, balancing commitments with expected distributions and other portfolio liquidity requirements. Modelling at the asset class or fund level ensures these illiquid constraints are managed and cash flows in and out of the portfolio do not materially impact the overall portfolio allocation. 

Adapting to market cycles

Market conditions and opportunities vary, requiring dynamic adjustments to commitment pacing strategies to capitalize on favorable environments and mitigate risks during downturns. Regularly reviewing portfolio exposures and cash flow projections along with market opportunities ensures the best long term potential for allocating to alternatives.

Utilizing investment tools: Optimizing commitment pacing

Effective commitment pacing requires sophisticated tools and analytics to ensure that allocations to private assets align with the overall investment objectives of the portfolio. Jacobi’s Private Asset Modeling module, including its Commitment Pacing Application, empowers investment managers to confidently integrate alternative assets into broader portfolio planning:

Cashflow forecasting

Jacobi’s tools forecast the evolution of private asset cashflows and NAV over time for both existing assets, and for planned future commitments. This enables investment managers to solve for the optimal commitment pacing approach that balances reaching target allocations within a reasonable timeframe with maintaining a steady commitment pace to achieve vintage year diversification. For existing assets, the modeling picks up actual details of fund commitments, NAV, and drawdowns, and can apply standardized asset class-based assumptions for future outcomes, or fund-specific assumptions. For planned commitments, standardized assumptions and parameters are used at the asset class level.

Commitment Pacing

Optimal commitment pacing aims to minimize deviations from target allocations, considering the portfolio’s initial value, long-term growth rate, and overall cash inflows and outflows. This forms the foundation for a commitment budget. However, plans must remain flexible. Client needs and market conditions often evolve, and Jacobi’s platform allows investment managers to dynamically adjust commitment plans over time. By incorporating regular updates on realized cashflows and NAVs, managers can iteratively refine forecasts, ensuring portfolios remain aligned with their long-term objectives.

Client communication

Beyond answering quantitative questions, Jacobi’s Private Asset Modeling module also helps investment managers effectively communicate these complex strategies to end clients. By translating intricate models into actionable insights, the platform enhances client understanding and confidence, simplifying the challenges of managing alternative assets.

Conclusion 

Commitment pacing is a critical yet complex component of portfolio construction for investment managers working with alternative investments. By adopting a strategic approach and leveraging sophisticated tools such as Jacobi’s Commitment Pacer application, investment managers can effectively balance the need to reach target allocations with maintaining stability and vintage year diversification in commitment activity. In today’s evolving investment landscape, mastering commitment pacing is not just an operational necessity—it’s a competitive advantage.

Investment Management Insights

AI article image

Rethinking the role of portfolio optimization in investment management

The limitations of traditional optimization processes are well-known, leading many asset allocators to overlook their use in portfolio construction. In this paper, we discuss some of the known challenges in using portfolio optimizers, and how investors can use the optimization tools in Jacobi to overcome them.
Read More

Schedule a Demo

See how Jacobi’s highly customizable technology can support the scaling of investment processes and client engagement. Submit your information below to schedule a demo.