The decision in brief
A hypothetical $1.2 million reserve facing $300,000 of spending and $500,000 of annual calls lasts three years with $400,000 of annual inflows. Reducing those inflows to $150,000 creates an annual $650,000 net need and a $100,000 funding gap at the end of year two.
| Annual planning input | Base illustration | Lower-distribution illustration |
|---|---|---|
| Starting cash | $1,200,000 | $1,200,000 |
| Spending | $300,000 | $300,000 |
| Capital calls | $500,000 | $500,000 |
| Inflows | $400,000 | $150,000 |
| Net requirement | $400,000 | $650,000 |
| Year-two ending balance | $400,000 | -$100,000 |
Set the commitment ledger beside the portfolio
Assume a $12 million portfolio contains $4.8 million of private assets, $4.2 million of public equities, $1.8 million of bonds and $1.2 million of cash. Those are invented values. The current private-asset value is not the same as the remaining obligation to contribute capital. A separate commitment ledger is necessary to see amounts, notice periods and contractual dates.
The case assumes annual calls of $500,000 and annual family spending of $300,000. Actual calls can be irregular and actual distributions are uncertain. Aggregating them into annual figures is a first-pass model; a real funding process needs dates and settlement constraints.
Calculate the base funding path
With annual inflows of $400,000, net reserve use is $300,000 plus $500,000 less $400,000, or $400,000. Ignoring all return and other flows, the reserve finishes years one, two and three at $800,000, $400,000 and zero. That arithmetic does not mean a distribution is guaranteed or that an office can wait until the end of year three to act.
If a call is due early and the distribution arrives late, a temporary gap can occur even when the year-end balance is positive. A useful next version runs a monthly schedule and labels each inflow by its source and confidence.
Change one assumption
Now reduce annual inflows to $150,000 while holding calls and spending fixed. The net requirement rises to $650,000. Cash falls to $550,000 after year one and to negative $100,000 after year two. A negative model balance is an unmet funding need; it is not assumed borrowing, an approved overdraft or an actual portfolio loss.
The $250,000 change in expected annual inflows has a direct funding effect. No private-asset return estimate is needed to reveal it. That is why valuation modelling and cash-flow modelling should be connected but inspected separately.
Define available actions and their limits
List funding routes before they are needed: existing liquid holdings, planned sales, an appropriately documented credit facility, reduced discretionary spending or changed future commitments. Each route has eligibility, cost, timing and approval questions. None is automatic merely because it appears in a spreadsheet.
Selling a liquid asset can alter allocation at an inconvenient moment. A facility may depend on collateral, covenants or a lender's continuing willingness. Avoid counting the same bond holding as both a permanent liquidity reserve and collateral that cannot be sold freely.
Turn the result into a monitoring rule
The committee should know who reconciles calls, who updates expected distributions and when a funding exception is escalated. A report can show current reserve, committed outflows, assumed inflows and the first period needing another source. Separate a conservative scenario from a central estimate rather than blending them into one unexplained number.
This exercise demonstrates an exposure to the timing of cash flows. It does not measure the suitability or return potential of private investments. The allocation decision should follow a broader review of objectives, access, fees, governance and the ability to tolerate illiquidity.
Decision points
- Unfunded commitments belong in a separate dated ledger.
- Lower distributions can change the funding decision without any new return forecast.
- Negative projected balances require an explicit funding action.
Test a different assumption
The tools use explicit hypothetical inputs. Change the spending, liquidity or portfolio assumptions to examine the arithmetic behind your own illustration.
Sources and further reading
The linked sources provide conceptual background. The worked examples and planning assumptions on this page are this publication's own illustrations.