Working Paper: CEPR ID: DP16910
Authors: Elise Gourier; Ludovic Phalippou; Mark Westerfield
Abstract: 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 premiumto 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.
Keywords: capital commitment; private equity; commitment risk; liquidity premium
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital commitment (G31) | portfolio allocation (G11) |
| commitment quantity risk (D81) | welfare cost (D69) |
| commitment quantity risk (D81) | investor welfare (G24) |
| commitment timing risk (C41) | welfare cost (D69) |
| commitment quantity risk (D81) | commitment risk premiums (G12) |