In our previous paper, From Allocations to Exposures: Private Asset Considerations within a Total Portfolio Approach, we argued that portfolio construction with private assets is best understood as a continual, forward-looking process. Commitment pacing shapes the trajectory of exposures, determines how liquidity is distributed, and constrains the options available at each subsequent stage. That framing raises a further challenge: evaluating whether the portfolio being built is resilient to adverse conditions before those conditions arise.

Standard risk measures are poorly suited to that task. Volatility, correlation, and value-at-risk measures derived from reported returns understate the risk private assets contribute and delay its recognition, so a portfolio that appears well diversified under normal conditions can behave very differently under stress. Stress testing and scenario analysis address this more directly, examining what the total portfolio would look like under specific adverse conditions and how it would evolve through them. This paper explores how these tools can be structured for portfolios with meaningful private market exposure, and highlights the insights they offer beyond point-in-time measures.

Read the original article here.