What is the denominator effect?

Listed stocks and bonds reprice every day, while private funds are valued quarterly and reported weeks after quarter end, so their marks lag. Most investment policies set a range around each target, and breaching it usually means reporting to the board with a plan. The same arithmetic runs in reverse when private values rise faster than public ones.

Say a $10 billion pension holds $1 billion in private equity, 10%. Public markets fall and the rest of its portfolio drops from $9 billion to $7 billion. Private equity is now $1 billion of $8 billion, or 12.5%. Simple example. Terms vary by fund.

It can push pensions and endowments over their private markets targets, which can lead them to slow new fund commitments or sell fund stakes.