Private market capital market assumptions (CMAs) often inherit public market habits: Set total returns first, subtract fees separately, and infer risk metrics from historical de-smoothed data. This can produce implausible combinations of beta, correlation, volatility, leverage, and net returns. We propose a risk-first, economically disciplined framework that combines (i) economic priors as guardrails on systematic risk with (ii) forward-looking fundamental return models for value creation and financing, and (iii) an explicit, nonlinear fee module in which total fees are endogenous to expected returns. The approach is implemented as an iterative calibration that reconciles risk, gross returns, and fees into a coherent CMA set, improving coherence, transparency, and stress testing for private asset portfolio construction.
Hulme et al. (Thu,) studied this question.
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