As institutional allocations to private markets continue to increase, there is no doubt that the effects of a high-interest, highly-regulated environment are changing the way firms monitor and manage their illiquid investments.

The slow-down in fundraising, deal, and exit activity in 2023 triggered the numerator effect for limited partners (LPs), hindering their ability to make new commitments and generate returns. In this environment, cashflow forecasting and commitment pacing are critical to rebalance portfolios, as marginal overallocations can have outsized impacts on planned commitments.

This slowdown in market activity also underscores the importance of portfolio transparency. Many sub-asset classes have been performing below historical averages for the second consecutive year, and with slower economic growth, high interest, and higher inflation, compressed margins will continue to restrict multiple expansion, prompting asset managers to hone in on value creation strategies to generate alpha. Gaining visibility into underlying asset performance across time series has become a non-starter. Similarly, forecasting performance and liquidity have become central to capital planning for allocators.

Illiquidity creates new challenges for portfolio visibility

Amid current macro-economic headwinds, LPs must triangulate target allocations by engaging in rigorous cashflow forecasting and commitment pacing exercises. By the same token, with exits curtailed and internal rates of return (IRRs) becoming a less reliable measure of investment value, LPs need to gain deeper insights into their private markets portfolios by conducting more sophisticated analysis at both the fund and asset level.

Despite these hurdles, investors who successfully turn challenge into opportunity can better manage liquidity. To come out on top, LPs must use technology to their advantage - leveraging powerful portfolio analytics and forecasting capabilities to navigate a perpetually changing investment environment.

Fund and portfolio analytics

High interest rates and a difficult exit environment are threatening portfolio asset valuations, and GPs are increasingly relying on value creation efforts to drive returns. This means LPs must enhance their own analytics capabilities so they can track performance at the fund and portfolio-company level.

This requires dedicated portfolio monitoring software such as our iLEVEL solution, which consolidates data from fund investments, co-investments and direct investments on a single platform, streamlining data-intensive workflows and enabling firms to scale their operations. This enables LPs to:

● Analyze exposure to specific industries and geographies at the fund or portfolio-company level.

● Gain transparency across funds and direct investments.

● Determine performance at the total portfolio level, by legal entity, by strategy, and by vintage year.

● Configure dynamic dashboards and reports based on unique organizational requirements.

● Compare fund performance against Cambridge Associates benchmarks or any other standard.

Access to robust analytics capabilities gives LPs visibility into exposures and benchmarks fund performance, enabling them to make critical decisions about their private investment portfolio at scale.

Cashflow forecasting

With slower distributions creating cashflow implications, LPs need flexible forecasting tools that provide visibility into current and future investments to inform commitment pacing.

While there is no industry standard cash forecasting model, many LPs have leveraged the Takahashi Alexander model to inform target allocations. The Takahashi Alexander model is a computationally simple, yet flexible option to standardize cash forecasts across the firm while maintaining the flexibility to adapt scenarios based on external factors or unique organizational requirements. Still, many LPs have developed bespoke models to determine forecasts.

iLEVEL's Cash Forecasting Module supports a dual-track approach that enables users to leverage either the Takahashi Alexander model or their own proprietary cashflow models to configure forecasts. The modelling engine sits alongside a pacing planner that allows users to forecast their total private markets exposure against targets for existing and future investments. LPs can use this module to:

● Leverage the Takahashi Alexander or customized cashflow profile model

● Adjust models using custom parameters based on external or internal factors

● Define parameters for their existing portfolio and assign scenarios to future investments

● Use out-of-the-box scenarios based on a historical analysis of our extensive private markets data across investment strategies

● Develop and revert back to past models and forecasts across the organization

Capturing What's Next

While LPs are facing unprecedented illiquidity in today's private markets, there may be light at the end of the tunnel. A recent MergerMarket white paper on private markets trends indicates that the majority of alternative asset managers (65%) believe that deal activity will increase in 2024 compared to the previous year.

Whether or not the current state of illiquidity eases into a more active market in the near future, it has shone a spotlight on the importance of accurate portfolio monitoring and cash forecasting. LPs who take this opportunity to build more visibility, vigilance and scalability into their monitoring and management processes will be able to seize essential intelligence and capture what's next, regardless of the direction the private markets take.

Learn more about iLEVEL here.

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