Capital Commitment

Elise Gourier, Ludovic Phalippou, and Mark M. Westerfield
Journal of Finance 2024, 79(5): 3407-3457
Awarded Netspar Research Grant RG2012.04

[PDF] [Journal Version] [SSRN Version]

Summary

We quantify the capital commitment problem of limited partners in private equity. Investors are willing to pay a significant premium to adjust the quantities committed but not to resolve timing uncertainty. Commitment risk premiums do not disappear even if investments are spread across multiple funds.

Abstract

Over ten trillion dollars are allocated to private market funds that require outside investors to commit to transferring capital on demand; most of these funds are Private Equity (PE). We show within a novel dynamic portfolio allocation model that ex-ante commitment has large effects on investors’ portfolios and welfare, and we quantify those effects. Investors are under-allocated to PE and are willing to pay a larger premium to adjust the quantity committed than to eliminate other frictions, like timing uncertainty and limited tradability. Perhaps counter-intuitively, commitment risk premiums increase with secondary market liquidity and they do not disappear even if investments are spread over many funds.

Cite as

Gourier, Elise, Ludovic Phalippou, and Mark M. Westerfield. 2024. “Capital Commitment.” Journal of Finance 79(5): 3407–3457. https://doi.org/10.1111/jofi.13382

BibTeX

@article{GourierPhalippouWesterfield2024,
  author  = {Gourier, Elise and Phalippou, Ludovic and Westerfield, Mark M.},
  title   = {Capital Commitment},
  journal = {Journal of Finance},
  year    = {2024},
  volume  = {79},
  number  = {5},
  pages   = {3407--3457},
  doi     = {10.1111/jofi.13382},
  url     = {https://doi.org/10.1111/jofi.13382}
}

The PDF posted here is the authors’ manuscript (January 2022 draft). The version of record is available from the journal at the DOI above. Updated October 5, 2026.