Why private-market illiquidity can benefit clients

Asset-managers explain how private investments help 'protect investors from themselves'

Why private-market illiquidity can benefit clients

For many professionals and investors considering private investment strategies, the idea of months- or years-long illiquidity can present a challenge. But rather than a drawback, experts at a recently held Wealth Professional Advisorconnect roundtable on alternative investments agreed that it’s actually a benefit.

“I think the general approach [people have taken] is that every single thing that an investor owns needs to be liquid. Whereas it's not true,” said Marc-Andre Lewis, executive vice-president and chief investment officer at CI Global Asset Management, at the webinar event. “Most investors can live really well with a portion of their assets being totally illiquid.”

Ready access to liquidity became a more urgent priority for investors last year. As rising interest rates and inflation wreaked havoc on their portfolios, investors were more prone to sell out of their positions.

Against that backdrop, some private funds found themselves deluged with payout requests, forcing them to make the difficult decision to gate redemptions.

For Travis Forman, senior vice president and portfolio manager at Harbourfront Wealth Management, the illiquidity in the private asset space helps investors avoid making “emotionally charged decisions.

“Knowing that 90- or 120-day liquidity [requirement] is there, you can’t just go run to the keyboard and hit ‘sell,’” he said. “The illiquidity of the private asset class almost protects the investor from themselves and actually smooths out the ride for all investors in the underlying pool.”

In the aftermath of drastic rate hikes, valuations in both public equities and fixed income have come under pressure. Given the historical lag in performance between public and private assets, some doom-and-gloom prognosticators are predicting there are challenges ahead for non-public assets.

But Dennis Mitchell, CEO and CIO of Starlight Capital, offered a different take. While public market valuations are more volatile and vulnerable to short-term sentiment, he suggested private-market investments can be more effective in terms of measuring the fundamental value of an asset or business.

“There's nothing written in stone that says the public markets are an effective adjudicator of asset values all the time,” Mitchell said.

“Sometimes publicly traded markets can suffer and struggle to settle in on what is the correct value for assets going forward …  I would say the longer digestion period for private assets sometimes benefits you in that the value of businesses doesn't change that dramatically second, to second day to day, week to week, [or] month to month.”

After correcting sharply in 2022, he noted that publicly traded assets have undergone a bit of a recovery to start this year, while private assets have come down. While many predict private asset values will fall to meet the public markets, Mitchell suggested that the two spaces would converge more smoothly and over a longer time than people assume.

“You have to ask yourself … what are the value creation drivers that will allow you to overcome a slight moderation in what markets are willing to price [private assets] at?” he said.