Asset allocation and private markets: the need for a cash management strategy

A key issue all investors must deal with in order to efficiently allocate their assets to private markets is the difficulty to reach and maintain the target exposure assessed by their asset allocation models. Contrary to what happens while investing in publicly traded asset classes, private markets funds perio- dically call just a portion of the allocated capital as well as they periodically distribute just a portion of the invested capital. In addition, being each fund characterized by a unique cash-flow dynamic, the relative composition of the invested portfolio varies over time. The portfolio optimization techniques used by the private markets investors must therefore be able to manage such a physiological and changeable under exposure in order to find out the op- timal asset allocation. In this context, the ex-ante inclusion of a proper and dynamic cash management strategy in the analysis is a necessary tool for iden- tifying the optimal portfolio. After having tested different cash management strategies, the paper introduces a practical approach to implement a sound private markets investment program.