An emerging issue for investors this year is liquidity, or potentially the lack of it. Liquidity and illiquidity always have been key considerations in any market.
In the years since the global financial crisis (GFC), liquidity has become a pseudo-asset class. Due to very low or even negative yields on “safe” assets, investors have been forced further out the risk curve to generate returns. Tremendous growth in the private equity and credit markets since the GFC largely is attributed to investors willing to accept illiquidity in order to obtain additional return.
Regulation has been a driver too, as banks were forced to exit some riskier types of lending. Also, regulation (e.g., Sarbanes-Oxley), plenty of private capital and Wall Street’s quarterly reporting game have made the public equity markets less attractive to some companies.
A byproduct of investors’ willingness to accept illiquidity to enhance returns has been asset inflation. Unicorns and the ability of so many money-losing companies to raise vast sums of capital at ever higher valuations did not occur in a vacuum.
Now some are concerned that liquidity, like leverage, is a two-way street. Its absence is not a problem when asset values are rising, but a negative feedback loop may develop if asset prices begin to decline. Investors may demand the return of capital from funds that lack drawbridges or indirectly sell illiquid assets that are held in a liquid wrapper (e.g., leverage loan ETFs).
It is just speculation as of early October, but the implications could be profound for private equity and credit fund marks if liquidity truly becomes a valuation issue.
FEATURE ARTICLE
Context is Important When Considering Transaction Data Relevance
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Updated Metrics for
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Publicly Traded Private Credit
Venture Capital