Commitment Pacing and the Denominator Effect

Endowments, pensions and other large institutions typically set a target allocation to private markets — say, 20% of the total portfolio — and then commit to new private funds gradually over several years, because a fund only calls capital as it finds deals, not all at once. This planned, steady rhythm of new commitments each year is called commitment pacing, and it's designed to keep the portfolio near its target allocation on an ongoing basis, replacing capital as older funds distribute it back.

Why a public market crash breaks the plan

The target allocation is a percentage — private assets divided by total portfolio value — and the total portfolio value is the denominator in that fraction. When public stocks and bonds fall sharply and quickly, as in 2022, the denominator shrinks fast because public prices are marked daily. Private holdings, valued only quarterly and with a lag (see Stale Marks and Understated Volatility), don't fall nearly as fast in the reported numbers over the same period — so private assets' share of the total portfolio rises mechanically, even without the private assets themselves gaining any real value. This mismatch is called the denominator effect, and it can push an institution well above its target private-markets allocation without it having bought a single new private fund stake.

The consequence for new commitments

An institution suddenly over its target allocation, on paper, typically has to slow or pause new commitments to private funds until public markets recover or private marks catch down — which starves fund managers of the fresh capital they were counting on, and can push some institutions to sell existing fund stakes in the secondary market (see LP Secondaries and Pricing to NAV) at a discount just to bring the ratio back down faster than waiting would.