Budgeting for Capital Calls – A VaR-Inspired Approach

In this paper we discuss the importance, and challenges, of forecasting private capital cash flows. Particularly importantis forecasting capital calls, since they constitute liabilities for
the investor. While it is useful to know the expected capital calls arising from an investor’s portfolio, it is more important to estimate a likely upper bound on those calls, since this
will determine the reserves needed in order to safely service the calls. To this end, we introduce a new concept, namely that of maximum probable contributions|a statistic which,
subject to a user-specied condence level, serves as such an upper bound. We explore in detail a historical methodology for its computation, illustrate typical model predictions, and document its out-of-sample performance during backtesting on both funds and portfolios of funds.