Forecasting the Cash Requirements of an Alternative Investment Program

Investors in alternative asset classes must forecast their net cash flows to determine how much money to reserve for capital calls. Currently, plan sponsors place a substantial portion of their commitment in cash to guard against the possibility of a liquidity crisis, thus lowering the expected retu...

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Bibliographic Details
Published in:The journal of private equity 1998-07, Vol.1 (4), p.56-63
Main Author: Philips, Thomas K.
Format: Article
Language:English
Subjects:
Approximation
Buyouts
Cash
Collaboration
Financial instruments
Internal rate of return
Investment portfolios
Owner earnings
Venture capital
Weighted averages
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Summary:Investors in alternative asset classes must forecast their net cash flows to determine how much money to reserve for capital calls. Currently, plan sponsors place a substantial portion of their commitment in cash to guard against the possibility of a liquidity crisis, thus lowering the expected return of their portfolio. In this paper, the author models a limited partnership as a bond with stochastic coupon payments, and derives simple bounds and approximations on the value of the distributions from a portfolio of partnerships. These approximations are used along with estimates of draw downs and distributions to determine the net cash flow of an alternative investment program. Armed with these projections, investors can reduce the size of their cash reserves and increase the expected return of their portfolio.
ISSN:1096-5572
2168-8508
DOI:10.3905/jpe.1998.409678