LPs have a lot on their minds. They just saw the liquid side of their portfolios take a massive hit from the economic turmoil brought on by the covid-19 pandemic.

And that is where a lot of their energies are currently focused, according to a recent report from PitchBook.

While LPs are tending to public equities and bonds, allocators are not rushing to alter portfolio targets for private assets. More than two-thirds of about 400 LPs polled by PitchBook responded that they are not planning to change their allocation percentage to private market investments over the next six months, said James Gelfer, senior strategist and lead venture analyst at PitchBook.

The situation is changing rapidly, and many investors want to wait until the market stabilizes to assess if portfolios need to be rebalanced, Gelfer explained.

The denominator effect – a phenomenon that arises when public assets drop in value and investors suddenly find themselves overallocated to illiquid assets – was an issue for many LPs during the Global Financial Crisis. Some investors were forced to sell their private asset positions if they exceeded the target allocation for private equity or venture capital.

LPs realized that tight allocation targets could be a problem in a volatile market environment.

After GFC, some LPs made their investment policy mandates more flexible, widening the allowable range for allocation targets, Gelfer said. Additionally, many policy statements allowed for asset classes to be outside of the targeted zone for up to two consecutive quarters.

These changes could help LPs escape the ramifications of the denominator effect. The longer time frame allows for private portfolio valuations, which often have a six-month lag, to reset, or public markets to gain back some ground.

Currently, many VC investors have additional insulation from the denominator effect issues. They entered 2020 underallocated to the asset class. “A lot of big pensions are 1 or 2 percent and some endowments are 5 percent under their VC target,” Gelfer said.

Another serious problem that LPs could face when public markets decline rapidly, is not having enough liquid assets to cover GPs’ capital calls. Gelfer said that there is no widespread concern of defaults from large institutions, but family offices could be more affected by large swings in public markets.

As for new commitments, LPs are still lining up to for name-brand funds, but fundraising will likely be a challenge for newer VC firms, Gelfer said.