A novel model enhances private investment cash flow risk assessment by integrating economic factors and randomness. It enables stress testing, scenario analysis, and portfolio risk management, helping investors optimize liquidity and allocation strategies.
Interested in having your article published in the Financial Analysts Journal? Find out how.
Abstract
We develop a method to assess cash flow risk faced by limited partners in private investment funds, including private equity, real estate, private credit, and infrastructure. Building on the Takahashi–Alexander model, our framework incorporates systematic economic factors and fund-specific randomness into capital call and distribution rates, along with a factor-based public market equivalent for growth. This structure links cash flow dynamics to macroeconomic conditions, enabling scenario analysis and stress testing. We demonstrate how the model supports stress testing, commitment strategy design, and multi-asset portfolio risk management, offering a practical tool for navigating uncertainty in private markets.