Focus on Liquidity Risk Sharpens as Slower Private Equity Distributions Persist | Chief Investment Officer
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Having a liquidity management plan is table stakes for institutional investors. These plans are meant to be long-term and take into account all sorts of changes in macro, micro and market conditions. However, even the best planning only goes so far.<br>Market dynamics are shifting rapidly, and institutional investors are refocusing on liquidity to ensure that they will be able to meet short-term and long-term needs.<br>Trade-Offs or Missed Opportunities?<br>One area in which liquidity issues are acute is private equity. A years-long slowdown in exits is now impacting investors across the board. Without expected distributions, some investors may find that they are technically over-allocated or nearing their investment targets for private equity. That is already having a knock-on effect in private equity fundraising, which is in Year 2 of a slowdown. Investors find themselves working through a series of trade-offs.<br>If not having a distribution from an existing general partner for deals closed years ago means investors either cannot or are not prepared to allocate to the next fund from that GP, the allocator might miss an opportunity. When some investors skipped a vintage with a manager after the financial crisis, that allocator ended up missing out on a round of high-performing funds. The ghost of trade-offs past is haunting the investment committees of today, which also means there is a measure of career risk in not allocating to a new fund. Yet there is also risk in maxing out an allocation target if the cash does not come back eventually.<br>For more stories like this, sign up for the CIO Alert newsletter.
“We’re seeing more clients take a look at their pacing models,” says Michael Forestner, the private markets global CIO at Mercer. “There are a lot of things you can do there to either commit a smaller amount of capital or adjust what you’re doing in co-investments, for example. Investors are also looking to the secondary market as a way to rebalance. All of these things are tools, but alongside that, people are making changes to their assumptions to account for longer holding periods. It may not be voluntary, but that is the reality at the moment.”<br>The IPO Effect<br>Forestner adds that the rise in initial public offerings in 2026 could eventually be beneficial for private equity distributions. However, the impact of a mega-IPO can mean that investors will have to make rebalancing decisions in response to a windfall.<br>According to Bloomberg data, the IPO of SpaceX, for example, could have a trillion-dollar impact on institutional portfolios once all the data are in. In a year in which other tech companies are considering IPOs that may have similar affects, institutional portfolios may find themselves flush with more cash than they anticipated.<br>Forestner says it will take time for all of that to work through, “once the lockups come off and investors can sell their shares in these IPOs, we are likely to see some sustained activity, but we won’t know the full impact to portfolios for at least a year.”<br>Beyond pacing, Jay Kloepfer, executive vice president and the director of Callan’s capital markets research group, says it is important for institutional investors to reconsider their return assumptions for the asset class. He explains that when looking at the historical performance of private equity, “it did well for the lucky few in the 1990s and early 2000s, but by the 2010s, it’s equal to or slightly above public equities.”<br>If investors are asking themselves whether they need to maintain their current level of investment in private allocations, especially if they are not getting the distributions they anticipate, Kloepfer sees it as a fair question. Similar questions are being asked regarding private credit investments.<br>“There’s a wish that ‘Well, we think the equity market is overvalued, so credit is a better place to be.’ Well, that credit is based on equity,” Kloepfer says. “You get into a situation where you have 5% in private equity—that feels good. Then you go to 10%. Then you get up to 10% in private equity, 10% in private credit, and you have real estate, maybe infrastructure. Now 35% to 40% of your portfolio is tied up in capital calls and illiquidity. You have to ask yourself if you can live with that going forward.”<br>Secondaries May Have Natural Limits<br>As a result of the focus on liquidity, activity in the private equity secondary market is up, year over year. Stakes being sold there are populating evergreen funds and there are plenty of willing buyers, but Kloepfer cautions that secondaries “aren’t a long-term planning tool.”<br>“You’re going to take a...