Applied Research Paper: Modeling Cash Flows for Private Capital Funds

This is the first of two papers on this topic.

In this paper we focus on predicting cash flows for private capital funds. We start by discussing the characteristics of cash-flow data that make these predictions challenging, and then examine several models for expected contributions and distributions, and evaluate their performance, both in-sample and out-of-sample.

We find that for contributions, uncalled capital, in addition to age, is a useful predictor. Distributions are more difficult to predict; we find that disentangling the effect of a fund’s performance on distributions produces better forecasts than other simpler approaches. We compare the models explored in this paper with those outlined by Takahashi and Alexander and find that they underperform our models by a wide margin. Finally, we draw some lessons regarding how to model cash flows, and how to measure model performance. We also make some observations regarding the intersection of risk and prediction with regard to cash flows.

The chart shows that the errors in the predictions of Burgiss models are much smaller compared to those of Takahashi and Alexander.

Backtesting Comparison of Burgiss Models Against That of Takahashi and Alexander


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