New Research: What Happens to Cash Flows During a Crisis?

In this brief we focus on the effect of two crises — the dot-com crash and the global financial crisis (GFC) — on private capital cash flows, disentangling these effects from those arising from returns.

Cash flows are strongly influenced by market crises. Distributions are both delayed and, of course, reduced. However, even contributions are reduced by about one half; venture capital contributions were reduced by somewhat more than that during the dot-com crisis, but by much less during the global financial crisis, only dropping by about a quarter. How market returns affect the performance of private capital has received a great deal of attention, including by us (see O’Shea and Jeet (2017)). However, much less has been written about how crises, namely extreme market returns, affect cash flows (contributions and distributions).

Pooled Contribution and Distribution Fractions

Note: The shaded areas represent the dot-com crash and the global financial crisis.