Liquidity refers to how quickly an investment can be converted into cash. In a high-net-worth investment portfolio, liquidity often seems unimportant until something happens, and it suddenly becomes crucial. When conditions tighten, liquidity issues often arise, and a lack of liquidity can really hurt.
Over the past decade, there has been an increase in illiquid investment opportunities for high-net-worth investors. Investments in private equity, private credit, unlisted property trusts, hedge funds, agricultural ventures, collectibles, and infrastructure have become commonplace in portfolios. While these investments can offer significant value and diversification, their illiquid nature means they cannot be easily converted to cash.
The additional value from these investments, compared to their listed counterparts, is due to the illiquidity premium— the extra return that investors demand for holding assets that cannot be easily converted into cash without a significant loss in value. This premium compensates for the risks and inconveniences associated with illiquidity.
Recently, I reviewed a portfolio that consisted of 97% illiquid investments. The client, who had built the portfolio from the sale of a business, focused on opportunities without considering their overall liquidity needs. Having sold their income-generating business, they overlooked the importance of maintaining liquidity, as they had removed their main source of cash generation. Caught short, they needed my help to determine and address their liquidity needs.
In the past six months, several large unlisted property trusts globally have either slowed or halted redemptions because they faced more withdrawal requests than they could cover with available cash. To avoid selling properties at discounted prices, they restricted or ceased redemptions. While this makes sense for the property managers, it poses a problem for investors who may face multiple such restrictions simultaneously, especially if they have not managed their overall portfolio liquidity.
The advantage of illiquid investments is they capture of the liquidity premium. However, the downside is that if you need your money in a hurry, you may not be able to access it. At the end of the day, life is unpredictable, and unexpected things happen. Keeping a level of liquidity in your portfolio is essential. Liquidity always matters, and regardless of the size of your portfolio, it is crucial to manage it according to your needs. Otherwise, you can be trapped.
Kind regards,
Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently
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