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Market Insights

What's liquidity worth to you?
Letter from the CEO
April 2024
Richard Pilosof
Principal, Chief Executive Officer

Recently in the news, we’ve seen several articles on Canadian private debt funds, highlighting some of the issues investors are facing as a result of today’s higher borrowing costs. In my own conversations with friends and clients, this topic continues to arise as some private debt firms have had to write down their loans and/or restrict redemptions from their funds (also known as “gating”). 

Over the last decade, we’ve seen money pour into private asset classes, particularly given the ultra-low interest rate environment from 2015 to 2022. The companies that private debt firms lend to often don’t have access to public markets and end up having to accept the higher rates in the private market. In the low-rate environment, private debt investors were happy to sacrifice valuation transparency and the ability to easily liquidate their invested capital from these funds to capture attractive higher yields. The recent sharp increase in interest rates changed the game for how investors evaluate liquidity and transparency within their portfolios.

In the past, private debt investments offered you an estimated 3-4% liquidity premium. However, the compensation for sacrificing liquidity has dramatically diminished in recent years, and today, it’s close to zero by some estimates. 

When allocating my personal capital, one of the questions I always ask myself is, “If I am locking my money up for X number of years, how much more of a return do I expect for that sacrifice?” In other words, “What is liquidity worth to me?” Having spent my entire career in debt markets where I’ve seen the impact of liquidity and pricing transparency on a daily basis, I think all investors should be asking this question in light of recent challenges in the private debt space.

The issue of transparency is another important consideration. The looser reporting standards in private markets are for the benefit of borrower valuations, but it leaves investors in the dark about their exposures. Private funds are usually more concentrated than public credit funds, which compounds the level of risk if an adverse event were to impact a particular company or sector. As such, it becomes ever more important to include more transparent and diversified investment solutions in your asset mix, striking the right balance between private debt and liquid public debt allocations.

Unlike a decade ago, investors today are not getting enough return for the money they locked up in search of yield. Given the current level of interest rates and the opportunity in public and freely tradeable assets, I believe investors need not sacrifice liquidity and transparency to achieve very compelling risk-adjusted returns from public markets. 

If you have any questions or would like to discuss the current market environment, please feel free to reach out to a member of our client team at any time. 




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