Allocating to Illiquid Investments

Stewards of endowments have long been advised that allocating to illiquid investments is critical to achieving long-term returns. Rather than trust conventional wisdom, Commonfund conducted research to quantify the role of illiquid investments.

Our proprietary models revealed that the amount of illiquidity, as represented by private investments, was the most important factor in the differences in performance. Quantifying this overwhelming importance led Commonfund to rethink investment processes, develop new analytical tools, and make more precise illiquid allocation decisions with clients.

At the January 2021 Association of Governing Boards (AGB) annual Foundation Leadership Forum, Commonfund, in partnership with Susan Scroggins, Senior Vice President for finance and treasurer of the board Valparaiso University, and Kimberly Kvaal, Vice President for finance and administration, St. Edwards, discussed their respective journeys to building out their private capital programs in partnership with Commonfund.

Valparaiso is far along in their journey. With a goal of a 50 percent allocation to private capital, they are currently at 45 percent with over 20 years of investing, making their first investment in the 1990’s. St. Edwards has just begun their journey and are strategically and incrementally building their private capital program. They just recently made their first commitment to bring them to 1 percent, with a target of 35 percent allocation to private capital long term.

Determining whether to consider private capital is a more straightforward answer - illiquid strategies boost alpha generation and, for long term institutional investors, help them achieve their return goals to maintain intergenerational equity1. With that said, determining the right size for a private investment program or policy allocation is based on finding the intersection between the need, ability, and willingness to take on illiquidity. Below, we highlight the intersectional framework discussed in more detail in a recent Commonfund article published in AGB’s “Trusteeship” magazine aptly titled “Your Most Important Endowment Decision”.

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“How much illiquidity do we need to achieve our long-term return objectives?”

This question reflects on the return objective required to sustain the mission in perpetuity. Variables such as spending rate, inflation expectations, costs, and contributions are some of the factors in determining a return objective. These inputs should be paired with asset allocation modeling to answer the question.


“What is the ability of the institution to take on illiquidity?”

This question must be asked and answered at both the portfolio level and at the institutional level. There are internal and external sources and uses of liquidity that must be understood. At the portfolio level, spending and contribution flows, cap calls, and distributions and rebalancing transactions are all sources and uses of liquidity. At the institutional level, revenues, debt capacity, contributions, and draws on unrestricted endowment or special appropriations are among the liquidity dynamics that must be considered. The ability to take on illiquidity, or make investments in private programs, is unique to each institution and should be based on scenario analyses that evaluate normal and stressed environments and the interconnectedness of portfolio and institutional liquidity sources and uses.


“What is the willingness to allocate to private capital programs?”

This third question forms the intersection of the decision to allocate to private programs. When it comes down to it, there must be willingness from the fiduciaries to make that choice. Admittedly more qualitative in nature, it is harder to answer this question. Institutions can use several strategic inputs (operational, markets, risk tolerance, etc.) to make this decision and put parameters around implementation.

Whether you are far along or just starting, if there isn’t a framework for committees to strategically build out and evaluate their allocation, they may haphazardly implement a program which can introduce unintended risks to the portfolio and the institution.

Listen to the full session from the 2021 AGB Foundation Leadership Forum


  1. Intergenerational equity was defined by economist James Tobin in 1974. He wrote, “The trustees of endowed institutions are the guardians of the future against the claims of the present. Their task in managing the endowment is to preserve equity among generations.” This principle has guided endowment investment policies ever since.


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