A well-structured pacing strategy enables LPs to maintain their target allocation in the face of liquidity risks and market challenges
Capital pacing is the process of managing and timing commitments to private market funds. It enables an investor to maintain target allocations to an asset class, while aligning commitments with its long-term goals and liquidity needs.
In the previous blog in this series, we discussed how asset allocation is the most important driver of long-term portfolio returns. An effective capital pacing plan underpins this. It plays an essential role in helping an LP achieve and maintain a target allocation.
Unlike public markets, where capital can be deployed instantly, private market investments require careful planning due to their unique drawdown and distribution structures. Without appropriate pacing, investors risk becoming under-allocated, which can limit return potential, or over-allocated, which can increase risk and illiquidity.
➔ At a glance: Key considerations in capital pacing
Three key components affect an LP’s private market allocation at any given time:
Capital calls: funds do not invest committed capital immediately but call it down over 3–5 years as investment opportunities arise.
Investment growth: once deployed, investments generate returns, contributing to portfolio value.
Distributions: as assets are realized, capital is returned to investors, requiring reinvestment to maintain exposure.
Capital pacing addresses two main points:
1. Scaling into a target allocation: LPs building a private market portfolio must phase in commitments gradually due to the time it takes for funds to deploy capital.
2. Maintaining allocation over time: as distributions return capital to LPs, they need to make new commitments to prevent a declining allocation.
How do LPs scale into a target allocation?
Building a private market portfolio requires patience. LPs phase in commitments over multiple years (typically 3–7 years) rather than committing all their capital at once. A gradual build-up smooths capital deployment, prevents liquidity strain, and ensures a more consistent distribution cycle.
This approach also facilitates vintage diversification, which is a key tenet of private market investing. By committing capital across multiple fund vintages, LPs can reduce exposure to market cycles and mitigate concentration risk.
Many LPs tend to adopt an overcommitment strategy to ensure the actual capital invested aligns closely with their target allocation to the asset class. Given the gradual nature of capital calls in private capital funds, a large portion of the commitment remains uninvested. If an LP commits 10% of its portfolio to private markets but the capital is called slowly, the actual invested amount may hover at only 5% for a while – leaving the portfolio underexposed.
But overcommitment must be done carefully. In stressed markets, distributions can slow dramatically. During the Global Financial Crisis, for example, LPs that overcommitted without proper liquidity buffers were forced into fire sales at steep discounts.
This is why getting the pacing of commitments right is crucial. Committing too much capital too quickly can lead to significant unfunded commitments before distributions start to materialize. On the other hand, committing too little in the initial years can delay reaching a target allocation. A structured, precise pacing model helps determine the optimal rate of commitments.
➔ Resource tip: Cash flow patterns from historical J-curve data can inform pacing strategy
LPs can develop more precise capital pacing strategies by analyzing historical J-curve data. An analysis of past commitments and distributions helps LPs understand when capital is likely to be called and returned, preventing over- or under-allocation at critical points.
While most funds follow a general J-curve cash flow profile – starting with negative cash flows and turning positive later – the shape and timing of the curve can vary significantly across managers.
For instance, according to Preqin data, buyout funds have a less severe J-curve effect and reach cash flow breakeven faster than venture capital (VC) funds (Fig. 1).
Fig. 1: Buyout funds hit breakeven sooner and have a less severe J-curve than VC
Net cash flow over time for buyout and VC strategies of vintages 2010–2024
Source: Preqin Allocator Hub. Data as of March 2025
There is also a wide dispersion between the top- and bottom-performing managers. Private equity funds in the first quartile (based on an equal weighting of multiple and net internal rate of return ranking) have, on average, reached cash flow breakeven in year seven, while for managers in the third quartile, it has taken until around year 10 to start generating positive cash flows (Fig. 2).
Fig. 2: Top quartile funds reach cash flow breakeven faster and have higher net cash flow than other quartiles
Net cash flow over time for private equity funds of vintages 2010–2024, by quartile
Source: Preqin Allocator Hub. Data as of March 2025
By understanding these differences, LPs can ensure they have sufficient capital to meet calls until funds reach cash flow breakeven.
A robust dataset that can be customized based on region, strategy, sector, vintage, and fund size enables LPs to tailor their J-curve analysis to understand the potential cash flow profiles of funds they are considering.
How do LPs maintain target allocations?
Reaching a target allocation is only the first step – investors must also actively maintain the allocation. As distributions and asset growth gradually reduce exposure to the asset class, LPs must consistently reinvest to prevent under-allocation.
These two examples illustrate some of the considerations for reinvestment.
Case study 1: Distribution reduces allocation
An investor aims to maintain 10% of its portfolio to real estate and commits $1mn to real estate funds.
If a fund sells a $200,000 property and returns the proceeds to the investor, its real estate exposure declines from $1mn to $800,000. Without reinvesting, the real estate allocation shrinks over time.
Case study 2: Asset class growth rates vary, which affects allocation
A real estate portfolio focuses on prime buildings that may generate a 5% annual return. A public equities portfolio might grow at 8% annually.
Even if no distributions occur, the stock portfolio grows faster than real estate, causing the real estate allocation to shrink proportionally. To maintain exposure, the investor must continue making incremental real estate investments.
Conversely, a VC portfolio may grow at an even higher rate, exceeding public equity growth. In this case, it may be unnecessary to reinvest every dollar of distributions – reinvesting 80 cents per dollar returned may be sufficient to maintain the desired allocation.
Using a cash flow forecasting model
LPs can build and maintain target allocations, optimize reinvestments, and avoid liquidity mismatches using a well-designed cash flow forecasting model.
Many LPs use models that are modified versions of the Takahashi-Alexander model, which projects future asset values and cash flows for funds in illiquid alternative asset classes.
➔ Resource tip: Use cash flow forecasting tools
While some LPs develop in-house models for cash flow forecasting, others use readily available market tools. For example, Preqin’s model is built on a modified Takahashi-Alexander model and utilizes Preqin’s extensive historical cash flow data to generate forecasts for capital calls, distributions, and net asset value.
Using these forecasting tools, LPs can understand how much capital to commit each year to ensure they reach and stay at the target level.
Mastering the art of capital pacing
Private market cash flows are inconsistent and unpredictable, making precision in pacing difficult. There is a high likelihood that investors will either exceed or fall short of the target allocation. LPs must decide which of these two potential outcomes most closely aligns with their risk appetite and strategic priorities.
For example, when investing in VC, if an LP gives priority to avoiding under-allocation, they have to be willing to take on more risk. This is particularly the case for VC because it tends to be a more volatile asset class and overexposure can lead to greater portfolio fluctuations. If LPs seek to avoid over-allocation, a more conservative approach may limit return potential.
A practical approach is to set upper and lower allocation bounds to asset classes, based on the investor’s liquidity capacity and return objectives. The upper bound ensures allocations do not exceed acceptable illiquidity levels, while the lower bound prevents underexposure that could lead to missed return targets.
Managing cash and liquid investments while awaiting capital calls
The timing and magnitude of capital calls can be unpredictable, so many investors hold a portion of their portfolios in cash or liquid low-return assets to service the capital calls. But they need to strike a cash liquidity balance between holding too much or too little.
Holding too much cash may lead to cash drag, reducing overall portfolio returns. On the other hand, failing to maintain sufficient liquidity can create funding shortfalls when capital calls occur.
Some LPs allocate capital to liquid public market instruments that mimic private asset characteristics, instead of holding cash. These proxies generate returns (but naturally hold more risk than holding cash) while maintaining liquidity for capital calls. For example, VC investors might hold small-cap equities with high growth potential; real estate investors could choose real estate investment trusts that track property markets; and private debt investors could invest in business development companies or high-yield bonds.
Utilizing innovations in the market
Evergreen funds have gained traction among investors seeking immediate private market exposure. Unlike traditional drawdown funds, which involve capital commitments deployed gradually over time, evergreen funds offer continuous investment periods and provide investors with rapid exposure to private capital.
However, despite their appeal, evergreen funds come with limitations. While they offer periodic liquidity, this flexibility is contingent on the availability of capital. Consequently, during periods of market stress, redemptions may be restricted or even suspended.
Investors may decide to combine evergreen funds with traditional drawdown structures to create a more balanced allocation strategy.
Planning for the road ahead
In the current market environment, a well-structured capital pacing plan is more important than ever. A Preqin analysis last year showed that distributions slowed down across active vintages, with rising interest rates and inflation in 2022 and 2023 constraining capital flowing back to investors.
For LPs relying on distributions to fund new commitments, slower cash flows can disrupt pacing strategies and hinder participation in attractive new vintages. As the analysis showed, some investors benefited from the elevated distributed to paid-in capital during 2021 and 2022, which provided excess liquidity – a buffer during times of limited cash flow. Others are adapting their pacing strategies by incorporating more tactical flexibility to navigate the evolving investment landscape.
While adjustments are necessary, LPs should avoid excessive short-term reactions. Given the long-term nature of private markets, overreacting to quarterly fluctuations could lead to poor decision-making – annual or semi-annual pacing reviews are usually sufficient. Having a disciplined yet adaptable capital pacing strategy is the key to achieving and maintaining target allocations to private capital in the face of challenging market conditions.
Our thanks to Steve Novakovic, Managing Director, Educational Programs at CAIA Association, who provided key insights for this blog.
➔ About Primers.
Preqin Primers are a series of short reports on the major trends shaping the alternative investment industry.
They combine key stats from Preqin Pro with the views of fund managers, investors, and service providers.
If you'd like to connect with our research team to share data or learn more about our methodology, please get in contact here.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin accepts no liability for any decisions taken in relation to the above.