Topic hub
Portfolio construction
Portfolio construction is how an investor decides what to hold and in what proportions. Private markets add a problem that public portfolios do not have: capital is committed first and drawn later, so an investor has to plan commitments, cash flows and liquidity to reach and hold a target exposure. This hub covers asset allocation, commitment pacing and liquidity.
Sections run from setting the strategic asset allocation and the illiquidity premium expected for locking up capital, to pacing and liquidity (unfunded commitments, deployment pace, the denominator effect), and then to the construction of venture fund portfolios (follow-on reserves).
Not in this hub: choosing individual managers, which is in Due diligence, and measuring results, which is in Performance and benchmarking.
Reference index
Asset allocation
2 concepts- Asset Allocation
- Strategic Asset Allocation (SAA)
Strategic asset allocation (SAA) is an investor's long-term target mix of asset classes, with permitted ranges, set by its governing body to meet stated return, risk and liquidity objectives and reviewed only periodically.
Commitment pacing and liquidity
4 concepts- Commitment Pacing
Commitment pacing is the plan for how much new capital an investor commits to private funds each year, sized with a cash-flow model so that invested NAV reaches and holds the target allocation without straining liquidity.
- Unfunded Commitment
An unfunded commitment is the portion of an investor's capital commitment to a fund that has not yet been called and that the general partner may still draw under the limited partnership agreement.
- Deployment Pace
- Dry Powder