Practical Applications of Cash for Calls: A Quantitative Approach to Managing Liquidity for Capital Calls

Abstract

In Cash for Calls: A Quantitative Approach to Managing Liquidity for Capital Calls, from the Fall 2022 issue of The Journal of Alternative Investments, Jerome Schneider, Sean Klein, Wade Sias, and Simon Fan, all of PIMCO, provide an approach to address the difficult task of minimizing cash drag while ensuring that limited partners can meet capital calls for private investments. By analyzing cash flow data for private equity, private debt, and private real estate funds, the authors quantify the extent of cash drag experienced when committed, but uninvested, capital is held in cash. They also illustrate the danger of holding the capital in public market equivalents (PMEs).

Using historical call rates, the authors then simulate a tiering approach to holding committed capital in assets that have a range of risk and return characteristics and dynamically adjust the allocation. They show this strategy performs similarly to constant proportion portfolio insurance. The portfolio grows when the market outperforms, due to commitments that are partially allocated to PMEs, while an allocation to safe tiers protects the portfolio in market downturns.