Managing risk and tempering volatility through diversification is hardly the only appeal of private market investments, of course. Private securities are often sought after for the potential for higher returns in return for long lock-up periods. Most professionals believe this to be true: The number of survey respondents who claim there is no longer an illiquidity premium is in the low single digits (Figure 3). The largest group is comprised of those seeing a modest premium. Investors are more likely than managers to argue that the premium is shrinking.
Current market participants accept the lack of liquidity as a fact of life, but the arrival of retail investors is inevitably testing this assumption. Existing vehicles and structures don’t pose a problem for endowments with long (or even evergreen) investment horizons, but they are less likely to be suitable for investors who need more dependable cash flows. This is of course true of asset classes beyond private equity as well. Venture capital, real estate, infrastructure, and private debt have all traditionally fallen on the less liquid end of the liquidity spectrum.
As Scott Baskind, head of global private credit at Invesco, points out, “…we continue to feel that attractive risk premiums exist in the less liquid forms of private credit and believe it would be a positive evolution to broaden access to these vehicles, but do recognize the importance of client education, transparency, and liquidity in getting that right.”
The asset management industry abhors a vacuum, so solutions are emerging to bridge this gap. Traditional models still dominate, but there are signs of change. A reinvigorated secondaries market is being bolstered by the arrival of noteworthy new participants. Exchanges such as Nasdaq Private Market and others are facilitating transactions across multiple types of securities.
Networked platforms such as CAIS and iCapital are easing access for advisors. Private equity is even finding its way into 401(k) plans and packaged investment vehicles. The premium is still very real, but it’s likely to shrink as liquidity options multiply in coming years.continue reading
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