“Capital Commitment”
Summary (also generated by AI): Summary
The article examines the effects of capital commitment requirements in private equity funds on investor portfolios and welfare. The authors propose a dynamic portfolio allocation model to analyse the impact of these requirements, specifically focusing on the costs associated with commitment timing and quantity risks. The study finds that commitment quantity risk, where investors cannot adjust their allocation at the time of capital call, is the most significant friction. This results in under-allocation to private equity, as investors fear being locked into suboptimal positions due to fluctuations in liquid wealth. The article further investigates the effects of diversification and time-varying liquidity cycles on these risks, ultimately finding that commitment risk is not easily diversifiable and can be exacerbated by liquidity cycles. The authors conclude by highlighting the implications of their findings for investor behaviour and the importance of understanding the nuances of capital commitment in private equity.
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Source: Capital Commitment, by E. Gourier, Ludovic Phalippou and M. Westerfield, 2024, 79(5), Journal of Finance
