Quantification of Reinvestment Risk in the Private Investment Portfolio

Abstract

Inherent in an early distribution from a private market investment is the risk that funds reinvested in either a liquid vehicle (with immediate reinvestment) or in a private market vehicle (after a delay for locating and committing to another private investment) will not achieve the returns expected for the original private market investment. Using equations derived in this article, one can calculate the reinvestment risk intrinsic to receiving a private investment distribution earlier than anticipated in the original time horizon. Analysis of the reinvestment risk may suggest private market investment policies most consistent with an investor's risk tolerance and financial goals.