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Cash Dilution in Illiquid Funds

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  • Everts, Martin

Abstract

Cash dilution, the effect of performance reduction through cash, exists in almost every illiquid fund. This article provides a brief overview of the problems of cash dilution in illiquid private equity fund of funds, a formula for the calculation of the cost of cash dilution, two possible solutions for the reduction of cash dilution (namely the over-commitment strategy and a formula to calculate the optimal degree of investment in other assets), an evaluation of the effect of cash dilution in private equity fund of funds, and an evaluation of the usefulness of the over-commitment strategy.

Suggested Citation

  • Everts, Martin, 2002. "Cash Dilution in Illiquid Funds," MPRA Paper 4655, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:4655
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    File URL: https://mpra.ub.uni-muenchen.de/4655/1/MPRA_paper_4655.pdf
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    References listed on IDEAS

    as
    1. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
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    3. Black, Bernard S. & Gilson, Ronald J., 1998. "Venture capital and the structure of capital markets: banks versus stock markets," Journal of Financial Economics, Elsevier, vol. 47(3), pages 243-277, March.
    4. Brophy, David J. & Guthner, Mark W., 1988. "Publicly traded venture capital funds: implications for institutional "fund of funds" investors," Journal of Business Venturing, Elsevier, vol. 3(3), pages 187-206.
    5. Gompers, Paul A., 1998. "Venture capital growing pains: Should the market diet?," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 1089-1104, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Illiquid Funds; Private Equity; Cash Dilution; Cash Drag; Over-Commitment; Performance; Venture Capital; Buyout; Mezzanine Debt; Investment Strategy; Cash Flow Pattern; Take-Down Pattern; Distribution Pattern;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

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