Liquidity stress test for unfunded commitments
If public markets fall, can you still meet capital calls and spending without selling at the bottom, and how far does your private allocation drift? Enter your portfolio and a shock to find out.
- Private share after the shock
- Liquidity coverage, year one
- Equities you'd have to sell
- Cash needed in year one
Allocation before and after
Liquid reserves against cash needs
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Why allocators stress-test liquidity
In a sell-off, three things happen at once. Public assets fall, private valuations lag, and distributions slow while capital calls keep coming. Allocators who haven't planned for it end up selling equities near the bottom, or selling fund interests at a discount, to meet commitments and spending.
How to read the results
- Coverage is how many months of year-one net cash needs your cash and bonds can pay after the shock. Many allocators want at least twelve.
- Equities sold means cash and bonds ran out and the model had to sell public equity.
- Private share above your policy limit is the denominator effect. It can limit new commitments for several years.
What this test assumes
- The shock happens at once, then the stress lasts the years you enter, with no growth in equities, bonds or private NAV.
- Cash needs are paid from cash first, then bonds, then public equity. Private holdings are never sold.
- Net inflows go to cash. There's no rebalancing back to target.
- Spending is a percentage of the portfolio at the start of each year.
This is a planning tool, not investment advice. Real crises differ in depth, length and order.
Frequently asked questions
What is the denominator effect?
When public markets fall faster than private valuations, which are reported with a lag, private assets become a larger share of the total portfolio. That can push the private allocation above its policy limit without any new commitments.
What is a liquidity stress test?
A scenario analysis of whether a portfolio can meet its cash needs, such as capital calls and spending, after a market shock, and which assets would have to be sold to do it.
What happens to capital calls and distributions in a downturn?
Distributions usually slow sharply as exits dry up, while capital calls often continue as managers keep investing. The gap between the two is what squeezes an allocator's liquidity.
How much liquidity should an allocator hold against unfunded commitments?
There's no single rule. Many allocators aim to cover at least a year of expected capital calls and spending under a stressed scenario from cash and high-quality bonds, so they're never forced to sell equities at the bottom.
Can I sell private fund interests if I need liquidity?
Yes, through the secondary market, but in a downturn buyers usually demand a discount to NAV, so it's an expensive source of liquidity. Planning reserves in advance is usually cheaper.
From VC10X, hosted by Prashant Choubey. Updated .
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