Private Market and public equities: What about liquidity risks?

After the public equities and debt markets had a sharp sell-off in 2022, certain asset owners, like several US state pension plans, are now overexposed to private assets in comparison to goals. 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.

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—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.

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