Public-private solutions: squaring the circle?

Abstract

This article describes the challenges of reconciling the inherent liquidity risks of private markets investing with the demands of investors. We begin by, conceptually, unpacking the nuances of liquidity risk and the illiquidity premium. We continue with a parallel history of the growth of private markets, the unfolding of successive liquidity crises, and the development of new liquidity management tools. Finally, we discuss recent innovations that are expected to expand access to private markets significantly, while improving portfolio resilience in the face of liquidity risk.

Certain investors seek a portfolio-level investment approach that addresses the undesired layers of liquidity risk – in particular, portfolio-level spillovers and tail risks – while accepting the inherent illiquidity of private assets. They can then retain a substantial portion of the benefits of private markets investing, including both the illiquidity premium and other return and diversification benefits. Actively managed public-private solutions can achieve this for investors who lack in-house liquidity management capabilities, such as individual investors.