Hitting and maintaining a target private markets allocation

The importance of consistent investment

Investing consistently, if not evenly, over many years is the only way to reach and maintain a target allocation to private markets, given the way that capital is deployed and returned over time in private drawdown funds.

If you wanted to reach a 10% exposure to, for example, high-yield bonds, you can just shift the assets necessary to achieve that allocation into an appropriate bond fund. That does not work in private markets. Even if you immediately committed capital equivalent to 10% of a portfolio in a single vintage, the nature of private investments means your exposure would be incredibly unlikely to actually reach 10%.

Our pacing tool clearly illustrates this (see below). It lays out the expected cash flows from and back to an investor over the lifecycle of their investments, and then proposes annual commitment schedules to meet chosen long-term allocation targets, based on the selected asset classes (read more later in this article).

What our pacing tool shows is that with a single vintage investment (in this case, a 2025 allocation to a portfolio of drawdown funds balanced between private equity and venture capital,) an investor’s exposure would take this shape:

Given the bell-curve-like shape, it is obvious that the investor’s exposure to private markets would rise sharply then fall away again. And in this example, though an investor committed $755K in 2025, their actual exposure peaked at $701K in 2030.

In order to reach and maintain a target exposure, investors need to layer multiple vintages, as the modeled pacing illustrates below:

Of course, it is not as simple as just investing the same amount each year. With capital being returned over time, investors can start to reinvest their distributions into new allocations to create a positive loop or “flywheel effect” of growing wealth.

Our partners can use our suite of analytical tools - that update their projections for each client as new data emerges - to build an appropriate and sustainable allocation to private markets over the long term:

Outcome-related benefits

While consistent investment in private markets is essential from the perspective of simply reaching a “steady state” level of exposure for investors, there are multiple portfolio benefits to this approach in terms of portfolio risk and reward.

Time risk diversification

Consistent investment allows exposure across vintages - the years a fund first makes investments. This diversification can mitigate risks associated with market cycles. 

Similarly, it is very difficult to time markets. It is even more difficult to do so in private drawdown funds. Capital is deployed at the manager’s discretion (with an agreed time limit) over multiple quarters rather than all at once, and returned - exits are again at the manager’s discretion - at a much later date. A consistent investment approach ensures you do not miss out on what may turn out to be great entry and exit environments.

Idiosyncratic risk diversification

Regular investments in private markets provide access to a broad set of industries and trends, many of which are unavailable in public markets. This can help reduce portfolio risk by diversifying exposure to idiosyncratic trends and economic events as they emerge.

Behavioral benefits

Like public markets strategies such as dollar-cost averaging, consistent investments in private markets can offer behavioral benefits. Steady commitments can help investors ignore day-to-day market distractions and remain focused on their long-term goals.

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