求解释

问题如下：

In her discussion of liquidity issues, Zimmermann is most likely correct regarding:

选项：

A.annual portfolio rebalancing. B.maintaining current spending levels. C.the impact of an economic downturn.

解释：

Solution

A is correct. Private equity requires a long-term commitment of capital with very uncertain drawdowns of that commitment and return of invested capital. Early in the investment cycle, only a portion of the committed capital will be called by the general partner and the timing of future calls is uncertain. Later in the investment cycle, the timing of a fund’s sale of investments and return of capital to investors is uncertain. The investment itself is very illiquid (hard to sell in the secondary market); thus, rebalancing to a model allocation on an annual basis will be infeasible.

B is incorrect. Early in the private equity investment cycle, committed capital will be held in relatively liquid assets with lower expected returns to fund capital drawdowns that have uncertain timing. Further, little return will be realized from early-stage investments, particularly on the venture capital side of private equity. Also, bad investments tend to fail earlier than good investments succeed. Overall, private equity is subject to a J-curve, with low or even negative returns early on and high returns later on. For these reasons, the portfolio’s overall return will be lower in early years, reducing the endowment’s available spending according to its current spending rules and making it difficult to increase the spending rate in two years.

C is incorrect. In an economic downturn, capital calls for a newer private equity fund can accelerate because depressed market prices produce good investment opportunities precisely when the endowment portfolio’s public asset values are depressed. This can require either selling portfolio assets for negative returns to fund capital calls or abandoning the investment in private equity at a total loss. Further, in an economic downtown, the general partner of a more mature private equity fund will extend the fund’s life and avoid selling holdings at depressed prices, thereby reducing cash flows the endowment portfolio had anticipated.