24 Session 15: Pacing · Tactical Allocation · Stress Scenarios
| Unit | 3 — Decision and Application |
| Book Chapter | 7 (sections 7.4–7.6) |
| Track | Common core (both tracks) |
24.1 Learning Objectives
By the end of this session, students will be able to:
- Define the pacing problem — maintaining target allocation given irregular GP capital calls and distributions.
- Distinguish strategic from tactical private market allocation decisions.
- Apply the GE-LAV regime-conditional pacing framework: increase/maintain/reduce commitments by liquidity regime.
- Compute stress-scenario allocations for key episodes (GFC depth, COVID, 2022 rate shock).
- Recognize the multi-asset extension and why aggregate liquidity risk exceeds the sum of asset-class risks.
24.2 Pre-Class Assignment
- Read: Book Chapter 7, sections 7.4–7.6 (~10 pages)
24.3 In-Class Outline (75 minutes)
| Time | Segment | Format |
|---|---|---|
| 0:00–0:05 | Recap Session 14 · Today: dynamics + multi-asset | Lecture |
| 0:05–0:20 | The pacing problem | Lecture |
| 0:20–0:40 | Regime-conditional pacing | Lecture + table |
| 0:40–0:55 | Stress scenarios | Lecture + worked scenarios |
| 0:55–1:10 | Multi-asset GE-LAV — systemic liquidity beta | Lecture |
| 1:10–1:15 | Discussion: portfolio diagnosis exercise | Activity |
24.4 Discussion Questions
- CalPERS, Yale, and your school’s endowment all have stated PE targets between 10% and 30%. Apply the multi-asset framework: are these “PE targets” actually private-markets-totals targets when you include private credit, infrastructure, real estate? How does that change the over-allocation analysis?
- The 2008 stress test reveals that aggregate private market exposure can fall 40-50%. Does that mean LPs should hold a cash buffer of ~$0.50 per $1 of private markets exposure? What does GE-LAV actually recommend?
- The pacing framework recommends increasing commitments in deep stress (via secondaries). Most institutions do the opposite — they cut commitments in crises. Why does the framework recommend the contrarian approach, and why don’t institutions follow it?
24.5 Worked Numerical Example: Pacing Through a Stress Scenario
Scenario: A $10B pension fund with target allocation of 15% PE ($1.5B). Current state: late 2023, allocation is 18% ($1.8B) due to public market gains. Liquidity state \(L_t \approx -0.7\) (mild stress). Future calendar of commitments and distributions known approximately.
Step 1: Identify the regime
\(L_t = -0.7\) → Stress regime (between \(-1.0\) and \(-0.5\))
GE-LAV pacing recommendation: Pause new commitments; hold existing
Step 2: Determine target trajectory
If commitments paused, expected drawdown from natural fund maturities: - 2024: $200M distributions in, $0 new commitments → allocation drops to ~17% - 2025: $300M distributions in, $0 new → ~15.5% - 2026: Reach target 15% if conditions normalize
Step 3: Stress test
If GFC-style scenario hits in 2024: - NAV impact: -35% on PE → allocation appears to fall to ~12% (mechanically) - But liquidity-adjusted value is even lower - Forced rebalancing into PE? Or wait for recovery?
GE-LAV recommendation: Pause primary commitments; allocate to secondaries at distressed pricing (would increase PE exposure but at favorable entry \(L_t\))
Step 4: Pivot in different scenarios
- If stress deepens (L → -1.5): Deep-stress regime → opportunistic secondaries, ~0.7× steady-state pacing
- If stress eases (L → 0): Normal regime → resume primary commitments at steady-state pace
- If rate-shock persists 2+ years: Recalibrate; possibly accept that target should drop given persistent stress
24.6 What to Expect Next Session
Session 16 covers regulatory implications and crisis dynamics — book Chapter 8. We’ll examine:
- How GE-LAV interacts with Solvency II, AIFMD, IFRS 13, Basel III, GASB 72
- Crisis amplification mechanics (the 4.31× factor)
- Financial Stability Board concerns about private markets
- Why correct private market valuation has systemic implications
PS2 is due at start of Session 16. Work through it this week — Track 1 PS2 includes a portfolio exercise using today’s material.
Reading: Book Chapter 8, all sections (~15 pages).