When building a strategic private markets allocation, the waiting period can carry a meaningful cost. The question is not only how to access private markets, but how to manage uncalled capital during the ramp-up period.
As investors incorporate private markets allocations in their portfolios, many do so through traditional closed-end drawdown funds. While that structure can offer access to attractive long-term opportunities, it can also introduce an often-overlooked challenge: committed capital is not invested capital.
Instead, capital is called when portfolio company investments are made, typically during the early years of a fund’s life, with distributions generally beginning later. The result is the familiar J-curve, highlighted in the chart below. Looking at vintages from 2000 to 2020, on average, buyout private equity funds took four years to reach the “bottom” of the J-curve, at which point the fund is ~50% net called on a cash flow basis (cumulative capital calls minus cumulative distributions). After seven years, these funds have on average turned cash flow positive, though the time horizon has ranged from ~4-10 years.
We view the J-curve as not only a fund-level phenomenon, but a portfolio construction issue.
It Has Taken a Decade for Some Traditional Buyout Funds to Become Cash Flow Positive
J-Curve: Historical Net Cash Flows for Private Equity Buyout Funds Vintage Years 2000-2020
The J-Curve Effect Is a Total Portfolio Problem
Consider a traditional 60/40 portfolio that seeks to build a 10% allocation to private markets. Using a drawdown model, the portfolio could have very little private market exposure for several years and require multiple vintage year commitments to reach the target allocation.
Different Paths to Building Private Market Allocations
As investors build private markets exposure, they must forecast cash flows and contend with the uncertainty of when and how much capital may get called, in addition to when and how capital may be distributed back. During the holding period, uncalled committed capital can be an important driver of portfolio outcomes.
The table below outlines three different approaches to managing that capital. Some investors may prioritize speed in reaching private markets exposure targets, while others may prioritize potential cumulative portfolio gains relative to a traditional 60/40 baseline.
Holding uncalled cash is simple, but costly as it will earn little to no return. A second approach seeks to reduce cash drag without changing the overall portfolio mix: commit to drawdown funds, but keep uncalled capital invested in a balanced 50/50 stock-bond portfolio (reallocating 5% from both equities and fixed income to transition from 60/40 to 55/35/10). In effect, this allows the investor to maintain the broader 60/40 allocation while waiting for private fund capital calls.
This drawdown + 50/50 approach may improve cumulative returns relative to holding uncalled capital in cash, particularly if public markets are performing well. It also avoids a cash drag in the portfolio while the private markets exposure builds. However, it does not solve the core implementation issue: the investor still reaches their target private markets exposure over a longer time period and the capital reserved for future commitments may be susceptible to volatility in public markets. That may create timing risk if capital calls coincide with a drawdown in equities or rate-sensitive fixed income.
In our view, the most efficient way to mitigate the J-curve of drawdown funds is to pair that exposure with perpetual private market funds. Capital can be put to work in private markets sooner, potentially shortening the time needed to reach target allocation and reducing the drag associated with uncalled capital sitting in low-yielding instruments. Relative to a drawdown-only approach, perpetual structures may also smooth the implementation path by replacing a staggered funding schedule with more immediate deployment.
Closing the Gap Between Committed and Invested Capital
Diversification does not ensure a profit and may not protect against a loss in a declining market.
Blending Drawdown and Perpetual Funds
For investors moving beyond the traditional 60/40 portfolio, the challenge is not just deciding to invest in private markets, but how to do so efficiently.
Traditional drawdown funds do not offer immediate private markets exposure, which means a portfolio may remain meaningfully underallocated even after the commitment has been made. A blended approach combining drawdown and perpetual funds can close that gap more efficiently, though the success of this approach depends on the characteristics of the perpetual strategy itself.
In this context, we believe that the most effective perpetual allocations help capital remain productive without becoming a new source of instability within the portfolio. This includes strategies with shorter durations, lower historical volatility, limited correlation to traditional asset classes and a return profile grounded in income generation and contractual cash flows.
Paired with traditional drawdown funds, we believe select perpetual strategies can reduce cash drag, shorten the path to target allocation and align exposures closer to the investor’s intended allocation.
Cumulative Excess Gain Over Starting 60/40
Methodology
Model Overview. The analysis on page 4 presents a hypothetical 10-year portfolio projection comparing three capital deployment strategies (Scenarios A, B and C)against a static 60/40 reference portfolio. All scenarios begin with a $100 starting portfolio and assume a $10 annual commitment to a drawdown fund, deployed over a 16-year J-curve. Results are hypothetical and for illustrative purposes only. They do not represent the performance of any actual fund or account and are not a guarantee of future results.
Capital Market Assumptions. Long-term expected returns used in this model areas follows: Cash – 3.0%; Bonds – 5.0%; Equities – 8.0%; Perpetual (open-end)fund – 10.0%; Drawdown fund (IRR) – approximately 19.0%. These assumptions are forward-looking estimates and are inherently uncertain. Actual returns may differ materially.
Drawdown Fund J-Curve. Capital calls and distributions follow a modeled J-curve pattern over 16 vintage years, calibrated to produce a gross IRR of approximately 19.0% on committed capital. The J-curve is applied consistently across all three scenarios. Uncalled capital is treated as deployed into the designated “waiting” sleeve for each scenario until called.
Scenario Descriptions.
- Scenario A (Cash Sleeve): Uncalled capital is held in cash, earning the modeled cash return of 3.0% per annum. The portfolio is rebalanced annually to a target allocation of 55% equities / 35% bonds / 10% drawdown (inclusive of the cash sleeve and invested NAV).
- Scenario B (50/50 Sleeve): Uncalled capital is invested in a 50/50 blend of equities and bonds (earning the blended return of the target equity and bond weights) until called. The same 55/35/10 annual rebalancing framework applies.
- Scenario C (Perpetual Sleeve): Uncalled capital is invested in a perpetual (open-end) fund earning the modeled 10.0% return until called. The same 55/35/10 annual rebalancing framework applies.
Reference Portfolio. The 60/40 reference portfolio holds 60% equities and 40% bonds at all times with no drawdown allocation, producing a constant annual return of 6.8% under the stated assumptions.
Rebalancing. All three scenarios are assumed to rebalance annually to their respective target allocations. No transaction costs, taxes, or implementation frictions are reflected in the model.
Performance Metrics. Year 10 NAV, 10-year cumulative return, and 10-year annualized return are calculated on a pre-tax, pre-fee basis unless otherwise noted. “Cash drag” is measured as the difference in Year 10 NAV and annualized return between each scenario and Scenario C (Perpetual), which serves as the upper-bound comparator.
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