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Asset and Sub-Asset Allocation

Institutional investors often find it difficult to apply traditional asset allocation models to alternative assets. In particular, lack of accurate, readily available historical data and controversy over return conventions make the assessment of private equity portfolio risk less than straightforward.

Alignment Capital Group believes that thoughtful asset allocation among the sub-asset classes of private equity, such as venture capital, distressed securities, mezzanine and corporate finance, is necessary to build an effectively diversified portfolio and thus to avoid taking unnecessary risks.

ACG has developed proprietary methodologies to determine the degree of risk to be expected over time in the cash flows and valuation of a private equity portfolio. These techniques allow the firm to utilize traditional asset allocation models to build efficient portfolios for clients.

The ACG asset allocation model is customized to each client’s particular situation in order to ensure an optimal asset allocation decision. The ACG model includes time-dependent cash flow and valuation probability distributions extracted from a large database of industry cash flows and valuations. ACG incorporates these probability distributions into the analysis, taking the client’s asset allocation constraints into account, especially the client’s proposed commitment pacing schedule (the series of commitments designed to achieve a particular private equity portfolio market value as a percentage of total portfolio value).

The results are an asset allocation recommendation and a sub-asset allocation recommendation that fit the client’s investment objectives and risk tolerances, while avoiding potentially uncompensated risks.

Example: Asset and Sub-Asset Allocation