Over ten trillion dollars are allocated to private market funds that require outside investors to commit to transferring capital on demand; most of these funds are Private Equity (PE). We show within a novel dynamic portfolio allocation model that ex-ante commitment has large effects on investors’ portfolios and welfare, and we quantify those effects.
Investors are under-allocated to PE and are willing to pay a larger premium to adjust the quantity committed than to eliminate other frictions, like timing uncertainty and limited tradability. Perhaps counter-intuitively, commitment risk premiums increase with secondary market liquidity and they do not disappear even if investments are spread over many funds.
You can now read the full whitepaper at the link below
