The search for higher returns and better diversification has led many institutional investors to allocate more capital to illiquid private assets, which has come at the cost of decreasing portfolio liquidity. At the same time, private asset investors may encounter additional and hard to predict liquidity demands when, say, GPs make capital calls stemming from prior commitments.
Leveraging the cross-asset research capability and experience of the GIC's Economics and Investment Strategy (EIS) and PGIM's Investment Advisory & Solutions (IAS) teams, we've enhanced PGIM's asset allocation framework (OASISTM - Optimal Asset Allocation with Illiquid Assets) to link bottom-up private asset investing with top-down asset allocation so that liquidity measurement and cash flow management can be integrated into a multi-asset, multi-period portfolio construction process.
Investors can use this framework to analyze how allocations to illiquid private assets, in combination with their private asset commitment strategy, affect their portfolio's ability to respond to liquidity demand and address the following asset allocation questions:
- What should be the desired allocations to liquid and illiquid assets given the investor's liquidity risk tolerance?
- How would various market scenarios impact the portfolio's liquidity and performance?
- How to formulate a private asset commitment strategy to manage exposure and the uncertainty in timing and magnitude of cash flows over time?
This research is a collaboration between GIC EIS and PGIM IAS.
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The analysis in the paper is based on hypothetical modeling. There is no guarantee, and no representation is being made, that an investor will or is likely to achieve profits, losses or results similar to those shown. These materials are for informational or educational purposes only. The information is not intended as investment advice and is not a recommendation about managing or investing assets. These materials represent the views, opinions and recommendations of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein.
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