From illiquidity to liquidity: opportunities in private markets 

That makes liquidity a topical concept. Defined as the ease of buying or selling an asset without significantly impacting the price, it varies depending on your time horizon.  If your time horizon is 100 years, pretty much everything is liquid. If it’s a week then very little is.

Despite the rally in public equity markets in 2023 and 2024, private markets funds remain less liquid than usual.  We believe that liquidity in the form of distributions to limited partner investors should soon return to normal. In the meantime, though, they are running at about half their normal levels. What’s more, this unusual situation presents investors with different options depending on their time horizons.

For those seeking to exit who have sufficient time, we advocate patience. Waiting for financial market conditions to normalise is often the best way to maximise value. Indeed, DB schemes planning a buyout may have an overhang of private markets assets that are not that liquid. But selling them now could come at a cost in terms of haircuts to their value.  

For investors seeking to make fresh allocations to private markets, the advent of semi-liquid funds brings fresh opportunities. These may make private markets more accessible for investors such as defined contribution (DC) schemes. But they should not be viewed as a panacea.

We believe that those investors wishing to sell private markets assets to adjust allocations or prepare for a buyout would be wise to wait if they can for distributions to levels to normalise. As interest rates fall in Europe and North America, we anticipate that greater certainty will return to private market transactions. This is expected to happen within 12-18 months, possibly sooner.

Transparency regarding the future of interest rates is key to unlocking the market. Private equity and debt managers use rates as a reference when making acquisitions and disposals. The greater the certainty, the greater the alignment between dealmakers, and the more deal flow can be generated. We’re also seeing the interest rate spread compressing, which again helps to align buyers and sellers expectations and boost exit activity within funds.

Of course, DB schemes approaching buyout may not have time on their side and may have to sell. For investors looking to build out their private markets portfolios, this can lead to opportunities to invest through secondary markets at attractive discounts.

Investors who are unable or unwilling to invest in illiquid private markets vehicles have fresh opportunities in the form of the semi-liquid, open-ended fund structures that are being launched.  

Traditional private markets funds have closed-end structures that require investors to commit their capital for periods of 8 to 12 years. In contrast, the new evergreen fund structures allow you to redeem your capital every calendar quarter or half year. This is particularly true for funds focusing on income-generating assets such as debt, infrastructure, or real estate, where income can help meet investor exit requests.

Beyond greater liquidity, these funds have several likely benefits. They allow capital to be deployed swiftly into underlying assets. They also provide the flexibility for investors to regularly rebalance private markets allocations. 

Despite these advantages, though, the semi-liquid label has the potential to be misleading. After all, the underlying assets remain illiquid, so the funds may provide very limited liquidity for those seeking an exit.

If you choose to take advantage of private markets opportunities, how you construct your portfolio is key. You need to know the answers to several questions. 

Do you want to use secondary markets to build out your portfolio and manage liquidity? Or do you want to take advantage of the emerging generation of open-ended funds? Which asset classes do you want to focus on? How do you balance your portfolio across a range of strategies for sufficient diversification to minimise concentration risk? 

Most importantly, you want to ensure that the liquidity of what you buy matches your investment time horizon. After all, the liquidity, or illiquidity, of an investment is subjective, depending on how quickly you may want to sell it. 

Now is a time of opportunity in private markets – but only for those who are sure that time is on their side.