A Latent Factor Cash Flow Model for Alternative Investment Funds

Wen Cao and Misha van Beek

Financial Analysts Journal, 2025, vol. 81, issue 3, 60-75

Abstract: We develop a method to assess cash flow risk faced by limited partners in private investment funds, including private equity, real estate, private credit, and infrastructure. Building on the Takahashi–Alexander model, our framework incorporates systematic economic factors and fund-specific randomness into capital call and distribution rates, along with a factor-based public market equivalent for growth. This structure links cash flow dynamics to macroeconomic conditions, enabling scenario analysis and stress testing. We demonstrate how the model supports stress testing, commitment strategy design, and multi-asset portfolio risk management, offering a practical tool for navigating uncertainty in private markets.

Date: 2025
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DOI: 10.1080/0015198X.2025.2489923

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