One of the biggest challenges when
committing to a private equity fund is
what to do with your capital while
you're waiting for the manager to call
it. In any private equity deal it can
take between two to four years before
your capital is fully invested. In most
cases what we've seen is that investors
prefer to put their money in cash. One of
the biggest challenges with that is that
cash doesn't earn a return, and the
alternative is to put your money in
liquid securities. Markets tend to go up
80% of the time, so you have a very good
likelihood if you invest that in public
securities you would be ahead of the
game. Now certainly in the short run the
markets might go down and you experience
some volatility. A lot of people do the
same thing: they do what's called
bucketing their capital. If you
have five million dollars in investable
assets and you commit a million dollars
to a private equity vehicle you've
bucketed that. You've taken that million
dollars out. You've set it aside. The
reality is that money is fungible.
So if you actually commit a million
dollars to the private equity fund and
you keep all of your money, all five
million dollars of your capital invested
in public securities and growing, you're
not missing out on the market and you
have a very high likelihood of that
money growing over time. That is the best
and most efficient way to manage your
capital. Now it doesn't come without risk,
certainly the market can go down during
those two to four years but think about
it like this: if you have a healthy ratio
of liquid securities to private
commitments it shouldn't matter. This
strategy will outperform the alternative
of putting your money in cash.
