A question of liquidity
Liquidity is an important factor across these funds and changes materially between the different offerings, both at the vehicle and underlying asset levels.
Those that invest in private vehicles, such as JPMAM’s and Partners Group’s funds, tend to lock clients’ money in.
“If you invest in private equity you can’t do it in an open-ended vehicle,” says JPMAM’s White. “The strategy locks capital in for five years in order to have the ability to make private investments.”
The Partners Fund, meanwhile, is set up as an open-ended vehicle with monthly liquidity, but includes gating features limiting liquidity to 30% per annum. The underlying assets do not offer monthly liquidity. “That’s why the vehicle needs to be less liquid,” Cagnati says. “It is better to be less liquid than over-promise, which is one of the key lessons of 2008.”
The Partners Fund invests in assets with a range of liquidity profiles in order to manage the potential risk of a liquidity mis-match between client capital and underlying investments. Private investments are held within a range of 60% to 80% either through direct investments or secondaries.
By contrast, MSIM’s approach is much more liquid. “It’s important not to have gates,” says Joe McDonnell, head of Morgan Stanley’s Alternative Investment Partner’s Portfolio Solutions Group in EMEA, whose strategy predominantly invests in assets with daily, weekly or monthly liquidity, although some areas, such as hedge funds or catastrophe investments, have quarterly liquidity.
The fund’s strong AUM means it can accept some degree of liquidity mis-match.
“We have a significant number of clients within the strategy and we take on an amount of liquidity mis-match based on the profile of the client base,” McDonnell explains. “We are not buying highly illiquid private investments in the fund, but if investors want that, we can offer customised portfolios.”
Long-term view
The importance of liquidity will naturally vary between investors. However, institutional investors appear to understand the need for lock-ups and gates to avoid a mismatch, according to providers and consultants.
KPMG’s Koriath argues: “Investors have to be realistic about liquidity. If you want private equity and private debt, you can’t demand quarterly liquidity. You have to be willing to lock in for a few years. Quarterly liquidity won’t give you access to the best opportunities, or there will be a massive mismatch in the product.
“We are not big fans of multi-alternatives funds investing in listed underlying vehicles,” he adds. “The short- and mediumterm volatility is driven by equity markets and there is generally no illiquidity premium available.”
For some institutional investors, the illiquidity of multi-alternatives products is a distinct advantage, particularly because they can provide a way to delegate the greater governance burden associated with illiquid investments while providing diversification and the ability to exploit relative value opportunities.
As Lincolnshire County Council’s Ray concludes: “We can use the illiquidity premium to get a return on assets, and this (multi-alternatives approach) is the easiest way for us to do that.”
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