Private market and public equities: What about liquidity risks?
Karen Wendt, SFTL President & expert in responsible, impact and sustainable investing
After the public equities and debt markets had a sharp sell-off in 2022, certain asset owners, like several institutional investors offering pension plans, are now overexposed to private assets in comparison to goals. They have stretched their investment policies and invested more into the private market satellites, than in the core strategy consisting of public market instruments.
Due to a sufficient supply of central bank liquidity, investors were able to respond to low return expectations across asset classes and a need for diversifiers on the demand side. This has been seen by many as adding operational risk as well as execution and liquidity risk to the portfolios.
Instead, we argue from a macro perspective that in a world where returns from long-only passive “betas” are lower, markets are less trend-driven, and the business cycle has reemerged, there is a greater need for an active strategy.
An asset owner who wishes to gain equity or credit premia should have a bigger exposure to private markets now than 20 years ago, everything else being equal.
The denominator effect of the 2022 fall in public markets and a greater requirement for liquidity due to the FED put and the banks being wary to extend credit —present a new challenge in addition to the pressures that have propelled flows towards private assets over the last decade.
A difference between an illiquidity premium, a portion of a larger allocation to active investing strategies, and its function in promoting diversification will likely be made, with an emphasis on what investors are compensated for taking on illiquid exposure.