Question

Which of the following best describes the over-commitment strategy by limited partners? a. Minimizing the over-commitment...

Which of the following best describes the over-commitment strategy by limited partners?

a. Minimizing the over-commitment ratio.

b. Mitigating diversification over time

c. It is possible because on average, only a small fraction of limited partners commitments is invested each year

d. Striving for a maximum allocation of commitments per year

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Homework Answers

Answer #1

Overcomittment means having more capital committment than capital invested.

Consideration related to funds management is that during the life of a private equity fund, the total cash outflow would not be as high as the initially commited amount, and the timing and size of the cash flows will not be known until the manager actually makes the decision.

Thus, it is possible because on average, only small fraction of the partner's capital is actually invested in a given year. To increase this ratio of investment, they need to overcommit at the beginning. This also reduces opportunity cost.

OPTION C

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