Enter number of investments directly

Why can I not construct my fund model from number of investments instead of capital allocation percentages?

GPs that are used to deterministic Excel based models may want to just set a fixed number of initial investments, and construction their plan based on this number. There’s a few reasons why we don’t support this methodology.

We want to emphasize there is no right or wrong way to do portfolio construction. There are only approaches that are flexible and in-flexible. A flexible approach has the advantage of giving the GP multiple levers to pull to run varied construction strategies.

The problem with setting a fixed number of initial investments

The main problem with this approach are:

  • If you pick a number of deals that is too low, you might have too much unused capital

  • If you pick a number of deals that is too high, you will not have enough capital to do the deals

This usually then results in the GP having to iterate multiple times to land at a number of deals that leaves the least amount of under/over-allocated capital. If the GP then changes their assumption on follow-on checks, fees, expenses - the entire model breaks down again and they would need to iterate all over again to land at the optimal number of investments.

In fact, if any of the below variables change, the GP needs to go back and change the number of deals:

  • Fund commitment

  • Management fee assumptions

  • Initial and Follow-On Check size assumptions

  • Fund expenses

  • Recycling assumptions

In short, this is a fragile approach - that can very easily “break” the model by creating pools of capital that are unused or over-allocated.

The benefits of capital allocation

By setting capital allocations first,

  • Tactyc will ensure there is no unused/over-allocated capital. It will always fully use up all the available investable capital and give you the answer on number of forecasted deals.

  • It also takes far fewer number of iterations to land at the optimal number of deals and follow-on reserves. Simply set your ideal check sizes - and then it’s a matter of playing with capital allocation (%) to arrive at your construction strategy. You should be able to optimize your fund model in a couple of iterations.

  • If you change your mind on check sizes, reserve strategies, fees and expenses, recycling % - the model will automatically accommodate these changes without needing to change other parameters.

We believe this approach is more stable, flexible - and gives the GP’s multiple levers to pull to run varied construction strategies.

Closing Thoughts

If you are set on using number of deals as your starting point, we understand. And perhaps an Excel based approach might be more suitable in your use case. We would be happy to hop on a call and show you how to configure your model appropriately in Tactyc. Please reach out to us at support@tactyc.io if you would like our advice on how to setup your model.

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