Valuation challenges and dry powder in private equity

Valuation challenges and dry powder in private equity

Due to recent economic trends, we’ve seen a significant bump in the number of limited partnership investments in private markets – which is a really good sign for the industry’s long-term prospects. The positive outlook on returns has propelled more and more sophisticated investors to allocate a bigger share of their strategic asset allocation (SAA) to these private markets, across a wide range of asset classes.

Whether it’s in private equity (across venture capital, growth, and buy-out deals), private debt, private real estate, or infrastructure deals – there are plenty of opportunities for savvy institutional investors to make moves into the private investing space. This can be done through direct investments in specific assets, investment funds with a Limited Partnership structure, a fund of funds model, or through a traditional hedge fund.

However, in this piece, we’re going to explore the Limited Partnership approach and the specific benefits that this strategy offers when compared to direct investments. We’ll then explore three use cases for portfolio management technology that can enable better results for these sorts of deals.

Why is a limited partnership structure so attractive?

For some time now, the Limited Partnership structure has been a proven approach for investing in private markets at scale, offering various benefits compared to making direct investments.

Some of these key advantages include:

  • Diversification. When you invest in a private market fund, you are getting access to a portfolio of many different assets, providing diversification that spreads the risk and reduces the impact of a single investment on your portfolio’s returns.
  • Specific expertise. When you become a limited partner you can leverage the specific expertise and experience of fund managers who have specialised in selecting, managing, and exiting investments. This ensures that you can avoid costly mistakes and have greater comfort over the risk-return profile that you’re taking on as an investment.
  • Limited involvement. As a passive investor, you don’t have to take an active role in the company, allowing for your time and resources to be spent elsewhere.
  • Reduced volatility. In private markets, investors have committed to longer investment horizons due to the illiquid nature of those assets. They cannot react quickly to market events and this smooths out the volatility significantly. Valuations from fund managers are often done quarterly, resulting in less frequent and less pronounced price swings.

When it comes to the potential returns within private market asset classes, there has been a lot of research that aims to decipher the opportunity profiles and the historical returns. For example, one commonly held view is that private equity funds are less correlated to the stock market and often outperform a public market index. This study [1] from McKinsey & Co demonstrates this:

All private market asset classes posted lower returns yet outperformed public equities

So when you combine the potential returns and the advantages of structures like Limited Partnerships, it’s easy to understand how we’ve seen allocations to private market fund investments increase across the world, but specifically in the USA. More and more pension funds, asset managers, and family offices are looking into private equity funds and other similar investment vehicles to access opportunities and returns that just aren’t possible in the public markets.

To illustrate this shift, US pension funds allocated 13% of their assets to private equity in 2022, up from 11% in 2021 [2]. Single-family offices allocated 10% of their portfolio to private equity, up from just 7% in 2021 [3]. This is a trend that is likely to continue and so more and more investors need to seriously consider whether their reporting and analytics tools are suitable for a greater private market allocation. Portfolio management can become more complex and more challenging as you enter illiquid assets, and as such, the technology you use will often determine how efficiently and effectively you can design your processes and workflows, and ultimately how successful your investment strategy can be.

What makes LP Portfolio Management different from other asset classes?

While some private market investors will outsource the management of their portfolio, many will build up the capabilities internally. When this is the case, the limited partner will require a set of skills and software solutions to control and manage the investment process. This technology stack must enable continuous improvement of the investment process and it must adapt to the different requirements, components, and idiosyncrasies of private market investments.

This is often quite different from what a traditional portfolio manager of liquid assets might have to deal with, for a couple of different reasons:

  • Longer holding period. The exit options are quite limited for illiquid assets. Private market investors cannot rebalance quickly with low transaction costs like their public market counterparts are able to. Typically these investments may require a lock-up period where capital is committed for several years before any distributions are made. Portfolio managers therefore need to plan for these longer time horizons and understand that the nature of the asset class will limit their ability to make quick adjustments.
  • Capital calls and distributions. Managing capital calls and distributions is a fundamental aspect of private equity investments, especially when you consider the unique complexities related to the time bag between a commitment to a fund, the cash flows, and the value development. It requires a high level of sophistication to understand the mechanics of these investments and to apply them effectively. The capital deployment according to a target allocation is ramped up over a number of years and capital calls and distributions can change this allocation frequently. In addition, the portfolio value (NAV) builds up over years before distributions decrease the portfolio value. Any software tool must have the functionality to track and forecast these cash flows accurately, allowing investors to plan for fund commitments and liquidity requirements while still managing the overall risk-return profile of the portfolio.
  • Valuation challenges. Private equity investments are valued periodically which presents a unique set of challenges compared to the daily price fluctuations that you see in publicly traded stocks. As such, any portfolio management system needs to be able to support these irregular valuation methodologies while also providing tools for monitoring and managing valuation data.
  • Diverse investment structures. Private market fund investments often involve various investment structures that include Limited Partnerships (LPs), Limited Liability Companies (LLCs), and other complex structures. Because each structure needs to be managed and valued in different ways, the portfolio system needs to be capable of managing and reporting on these structures effectively if it is to be a single source of truth.
  • Asset allocation is more difficult to control. To ensure the desired level of diversification across different asset classes, strategies, vintages, managers, sectors, and geographies – a portfolio manager needs to have a deep and nuanced understanding of the funds they are investing in so that they can be mapped to all of these dimensions. Achieving this is simply not as straightforward as it is when you’re dealing with traditional shares and bonds. It requires frequent assessments of the current portfolio and look-through functionality from the portfolio level, through the fund level, and right down to the individual underlying assets.

These key differences illustrate why investors need to manage an illiquid portfolio very differently from a liquid one and that often requires a purpose-built set of tools and software that can enable this.

3 use cases for Analytical LP Portfolio Management

As we’ve discussed above, addressing the unique requirements of private market investments requires tools that can support portfolio managers across the entire investment process. Those who embrace this technology and make use of best-practice data analytics can limit the impact of human bias on investment decisions and leverage valuable quantitative analysis at scale.

Let’s explore three powerful use cases for this sort of technology to show why it can be such a useful solution to many of the challenges that we’ve discussed.

Increasing transparency in an opaque asset class

Analytical LP Portfolio Management solutions can help portfolio managers navigate opaque asset classes by providing data-backed decision-making support. These tools offer two critical capabilities, namely performance tracking and cash flow projections. When combined, these can help investors to value underlying investments, predict future cash flows, and anticipate capital calls – all in a platform that is built for collaboration and efficiency.

The benefits here span various functions within the investment landscape:

  • Investment teams benefit from streamlined performance assessment, pacing decisions, and investment preparation;
  • Reporting teams can save time through automated data management;
  • The Chief Investment Officer (CIO) can leverage this technology for developing and implementing investment strategies; and
  • Principal investors gain easy access to sophisticated reporting with real-time data.

Analytical LP Portfolio Management software enhances transparency and offers a range of valuable features including performance reporting, attribution analysis, benchmarking, and valuation. It also ensures data quality and enables automated data loading, reducing manual efforts – and freeing up resources to focus on higher-level tasks.

Overall, these tools empower investors to navigate the challenges of private markets, make data-driven decisions, and collaborate effectively across investment teams. What’s not to love?

Managing investment pacing and cash flows

Investment pacing refers to the strategy and timeline used by the LP to commit capital to various private equity funds over a specified period or to exit from current investments. This process involves careful planning and strategically committed capital to achieve the required diversification while managing risk and aligning with the LP’s investment objectives. As such, the specific pacing strategy used will vary significantly based on the unique goals and circumstances relevant to each LP.

LPs must adapt their pacing to follow strategic asset allocation (SAA) guidelines while maintaining the necessary liquidity to meet capital calls and allocation goals. Private equity funds often have a lifetime of 7 to 12 years, requiring LPs to deploy capital strategically over multi-year planning cycles. Slower distribution activity due to market conditions and the longer value creation periods necessitates careful cash flow management so that investors can meet their commitments and honour their capital calls.

Additional challenges in pacing arise for pension schemes with regulatory constraints and family offices. The denominator effect can force asset liquidation on secondary markets at discounted rates, making planning difficult.

This is where analytical LP portfolio management tools can assist LPs in mastering investment pacing challenges. Advanced data analytics help to mitigate human bias in decision-making and this makes for better success over the long run. This is especially true when you’re managing an over-commitment scenario. Systematically over-committing to funds can optimise capital deployment but it entails various liquidity risks – all of which must be managed through careful modelling and contingency planning.

Here’s what a typical workflow might include:

  • Define the portfolio implementation strategy. Analytical tools support SAA execution, risk management, asset diversification, performance analysis, rebalancing decisions, and cost efficiency. Reports and visualisations aid communication.
  • Cash flow projections. Private market cash flows depend on fund distributions and contributions. LPs establish cash flow projection models, enabling liquidity management, risk mitigation, and portfolio optimisation. Various models, including commitment and distribution models, are employed, with AI-based approaches gaining traction.
  • What-if scenarios for long-term portfolio balancing. Analytical tools facilitate scenario analyses, helping LPs prepare for various market conditions. Stress testing, dynamic asset allocation, and risk assessment are crucial tools to achieve this. Macroeconomic developments, currency rates, and fund performance scenarios are modeled to inform decision-making.
  • Compare plan with actuals. Retrospective assessment of scenarios improves planning, while collaboration among team members enhances scenario quality and fosters transparency.

Selecting the right fund managers

Fund manager selection is paramount in private market investments, with over 13,000 fund managers vying for $3 trillion in investable assets. LPs aim to choose top-quartile funds as the performance gaps are substantial, especially in private equity. Therefore, performing due diligence in private markets is crucial, and making the right choices in terms of manager selection is pivotal.

Data-driven analysis helps to assess a fund manager’s cohesiveness, experience, strategies, track records, and alignment of interests – all of which serve to reduce human bias. Analysing the track records of fund managers helps decision-makers to answer key questions about value creation and loss ratios. This is then combined with benchmarking and peer comparisons to provide the necessary context for historical performance.

Secondary markets benefit from asset-level analysis, determining fair market value, and optimising portfolio allocation. This is where analytical LP Portfolio Management can expedite the due diligence process by facilitating high-level fund selection and detailed track record analysis, improving decision-making and negotiation outcomes with data-driven insights.


In conclusion, it’s clear to see that institutional investors are increasingly turning to LP investments in private markets (and particularly to private equity funds) because of the potential for attractive returns, asset class diversification, and reduced volatility compared to direct investments. However, managing these sorts of investments brings with it a unique set of challenges that must be navigated with the help of purpose-built technology.

The right LP Portfolio Manager solution can aid portfolio managers by providing data-driven tools that enhance transparency, manage pricing, and help to make better investment decisions for illiquid assets that have a longer-than-normal holding period.

About Apliqo LP Portfolio Management

Apliqo LP Portfolio Management provides an easy-to-use and innovative solution for the challenges and use cases that come with managing a private markets portfolio.

Optimise your asset allocation based on risk-return ratios of each asset class with a single, unified view of your entire portfolio, and achieve the following:

  • Radical transparency on your investment performance with a unified tool for data collection, analysis, and reporting that’s built specifically for portfolio managers.
  • Optimise your fund investment decisions with superior analysis during due diligence.
  • Leverage more effective communication with key stakeholders with accurate and consistent performance reporting and analysis for private market investments
  • Reduce your efforts through powerful data management to increase velocity with automation.

Learn more about the solution at and embark on the product tour to explore how the software can help you with:

  • Performance reporting;
  • Cash flow projections;
  • Investment pacing;
  • Fund manager track record analytics;
  • Scenario development and tracking; and
  • Asset-level analytics.
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