Date June 27, 2024
Please note that the Asset Growth Simulator is currently only available as part of Private Asset Lab, and in Studio and Report Lab. To access Private Asset Lab and Studio or Report Lab, please reach out to your Client Solutions representative. Additional fees apply.
What is the Total Portfolio Asset Growth Simulation and where can I find it in Venn?
Venn's Total Portfolio Asset Growth Simulation enables users to project the growth of their total portfolio across both public and private market investments. The illiquidity of private asset investments means that investors need to plan accordingly for their upcoming cash needs while meeting the targeted private asset allocation levels. Venn’s Asset Growth Simulation within Private Asset Lab helps users estimate the probability of a funding shortfall and project the asset allocation of their total portfolio given their private asset commitment strategy and the forecasted growth trajectory of their liquid portfolio. The total portfolio asset growth simulation blocks can be found in the “Private Assets” section of Report Lab or Studio.
Venn offers two different types of visualizations: Percentiles and the NAV Breakdown.
Asset Growth - Percentile: this block shows the projected value of the total portfolio at various risk percentiles given the liquid portfolio’s forecasted risk and return, and the illiquid portfolio’s projected NAV and cash flows.
Asset Growth - NAV Breakdown: this block breaks down the projected value of the total portfolio at a user-specified risk percentiles into the liquid and illiquid components (either by value ($) or percentage). You can also plot a target private asset allocation curve to compare the projected asset allocation against the target level.
How does it work?
For the liquid (“returns-based”) portfolio, Monte Carlo simulation is used to project the NAV at various risk percentiles given the portfolio’s forecasted risk and return. At each quarter, the projected net cash flow from the illiquid (“private asset”) portfolio is added to the liquid portfolio, assuming capital distributions are reinvested and capital calls are funded by the liquid portfolio.
The Takahashi-Alexander Yale model is used to project the NAV and cash flows of the illiquid portfolio given the specified commitment strategy. Please refer to this FAQ for more details on the cash flow pacing model.
For each wealth curve generated by the Monte Carlo simulation, the projected liquid portfolio, illiquid portfolio and total portfolio NAVs are as follows:
Please note that any changes to your workspace’s forecast settings will also impact the results of the asset growth simulation.
What inputs can I configure?
Subjects - you must add one liquid subject (returns-based investment or portfolio) and one illiquid subject (private asset investment or portfolio). If you have more than one of either subject types in your subject group, Venn will select the first available liquid and illiquid subjects for the simulation.
Benchmark - you may select a benchmark (must be a returns-based subject) to compare the asset growth and probability of funding failure against.
Simulation start date - you can define when to start the simulation from. As default, Venn will start the projections from the current quarter end date e.g. if analysis is run on May 10th, 2024, simulation will start from June 30th, 2024 (Q2 2024) as default.
Years projected - time horizon of projection, up to 30 years available.
Risk percentiles - for the “Asset Growth - Percentiles” chart, up to 5 curves can be displayed at different risk percentiles. For the “Asset Growth - NAV Breakdown” chart, you must select one risk percentile to see the NAV breakdown.
Returns-Based subject starting NAV - the starting NAV of the returns-based portfolio. This value will also apply to the benchmark as well.
Scale - asset growth can be visualized on either a logarithmic scale or a linear scale.
Forecasted risk and returns - as noted above, the forecasted risk and return of the liquid subject is used for the Monte Carlo simulation. The forecast setting can be configured in the Factor Forecasts modal (click here to learn more).
How should I interpret the output?
Each curve in the cone chart (“Asset Growth - Percentiles” block) indicates risk percentiles, or confidence levels. The 99th risk percentile, for example, indicates that 99% of the simulation outcomes were at or below that level. The median or the 50th percentile curve represents the most likely outcome according to the simulation. The edges of the cone indicate the boundaries or the range within which actual results are likely to fall. For example, the output below shows that there is a 90% probability of the total portfolio growing to a value between $591M and $1.8B by Q1 2034, and only a 10% probability of the value being above or below that range.
The cone shape of the chart comes from the increasing uncertainty as we move further into the future, i.e. the range of possible outcomes expands as the time horizon lengthens.
What does funding failure mean and when does it happen?
The probability of funding failure indicates the risk of failure to fulfill projected capital calls committed, and is computed by identifying the percentage of simulation outcomes that experience funding failures. Asset growth simulation expects funding failure to occur when there is liquidity needed that can’t be met. For example, if the projected returns-based portfolio NAV is $5M and projected capital call is $10M, funding failure would occur. However, if there also was projected distributions of $15M (net cash flow +$5M), there won’t be a funding failure. In the asset growth simulation output, Venn will display the total projected NAV, total projected capital call, and up to the top 5 funds in the portfolio sorted by the size of expected capital calls.
How is the starting NAV of my private asset portfolio calculated?
The starting NAV of the private asset portfolio is the historical NAV of the private asset portfolio before the simulation start date. For example, if simulation start date is Q2 2024, the starting value will be the NAV of the private asset portfolio as of Q1 2024.
If there are funds in the portfolio with missing historical valuation before the start date, Venn will use the latest available NAV data point (adjusted by any historical cash flows). For example, if Fund A has NAV reported for Q4 2023 but not Q1 2024, the Q4 2023 NAV will be carried forward and will be used as the starting NAV for the simulation.
If funds have no historical cash flow or NAV data at all, the starting NAV of the fund will be treated as $0.
What are some assumptions underlying the simulation?
Liquidity risk of the returns-based portfolio is minimal.
Only assets in the returns-based portfolio and projected distributions can be used to satisfy future private asset contributions.
Capital distributed from the private asset portfolio is reinvested in the returns-based portfolio and distributed proportionally to its underlying holdings.
All dividends are reinvested.
No capital is added or withdrawn from the total portfolio.
Should I include my private asset investments in both my returns-based portfolio and private asset portfolio?
Returns of any private asset investments included in your private asset portfolio should not be added to your returns-based portfolio to avoid double counting of the same investment in the simulation.
What is the benchmark showing?
Returns-based benchmarks are supported in the “Asset Growth - Percentile” block. Adding a benchmark shows the simulation output of your selected benchmark coupled with your private asset portfolio, as if the select benchmark is your liquid portfolio. If your returns-based portfolio has a higher forecasted return than your benchmark with a similar level of forecast volatility, you would expect to see a lower probability of funding failure compared to the chosen benchmark.
Private asset benchmarks are currently not supported.
Will assigning the target private asset allocation enable Venn to calculate a commitment strategy that I can follow to maintain that allocation?
If you define a target private allocation % in the “Asset Growth - NAV Breakdown” block, Venn will plot a target private asset allocation curve. This is for visualization purposes only so that you can compare the projected asset allocation against the target level given the commitment strategy of your private asset portfolio. Venn currently does not calculate a commitment strategy based on the target allocation entered.
What are the data requirements for me to be able to use the total portfolio asset growth simulation?
For the returns-based portfolio, at least 1 year of daily or monthly data is required, but Venn will use up to 3 years of data if available for the forecasted risk and return calculations. This requirement may change based on your workspace’s forecast setting.
If your returns-based portfolio has quarterly returns, returns must first be interpolated.
Private asset portfolios are less liquid than public asset portfolios and have additional risks, including the risk of loss.
Cash flow pacing models rely on historical data and the typical cash flow profiles of an asset class or strategy to make projections based on assumptions. A fund’s or portfolio’s actual cash contributions and distributions will be different from those shown by the model.
This document highlights certain aspects of this feature. As an overview, it does not discuss all material facts or assumptions. Please see Important Disclosure and Disclaimer Information.