Capital Commitment

Abstract

Ten trillion dollars are allocated to illiquid vehicles for which investors commit ex-ante to transferring capital on demand – most of which are Private Equity (PE) funds. We design a dynamic portfolio allocation model in which investors commit capital to PE. Investors significantly under-commit and are willing to pay as much as 15% of their PE allocation to change the amount committed. A more liquid secondary market or access to multiple PE funds further increase the required compensation for commitment risk. The uncertainty about the timing of capital calls and the penalty in case of default have minor effects.

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