New Research: Budgeting for Capital Calls: A VaR-Inspired Approach

This is the second of two papers on modeling cash flows. 

The results in the first paper showed that contributions and uncalled capital, in addition to age, are a useful predictor of future cash flows. Additionally, we demonstrated that the approach outlined by Takahashi and Alexander underperforms our data-driven models. In this second paper, we deepen this examination, focusing our attention on budgeting for future capital calls.

We find that while it is useful to anticipate capital calls from an investor’s portfolio, we find it more practical to estimate a likely upper-bound of those calls. To this end, we introduce a new concept, the maximum probable contributions. This statistic is subject to a user-specified confidence level and serves as this upper bound. We explore in detail a historical methodology for its computation, illustrate typical model predictions, and document its out-of-sample performance by backtesting both funds and portfolios of funds.

Forecast of capital calls in one quarter for a portfolio with commitments to 55 funds (the portfolio includes buyout, venture capital, and real estate funds, as well as primary and secondary Funds of Funds; the commitments range from the very recent to those from ten years in the past.)

Get a copy of the executive summary of this report here.