Ramping Up to Your Target Allocation

In private equity investing there is a considerable lag between commitments and actual investment of capital. Funds of funds commit to underlying private equity partnerships over a two- to four-year period. In turn, the underlying funds generally invest in operating companies over a three- to seven-year period. As a result, the investor in a fund of funds can expect that cash exposure to the asset class will rise rather slowly.

Compounding this, realizations will start as early as the third year and accelerate in years four through seven. As a result, in most cases less than 70 percent of an investor's PE commitment will ever be outstanding. For this reason, it is necessary to overcommit slightly to the asset class.