A significant consideration in several aspects of Private Equity and Private Debt has been attributed to the liquidity (or lack thereof) of these investments. The liquidity factor has been cited as a basic investment decision, influencing complex pricing, return of investment and financial risk management. But as the environment has changed and matured, is liquidity being considered as it should be?
FRG’s ongoing research suggests that some of the changes this asset class are experiencing may be attributable to changes in the liquidity profile of these investments, which in turn may affect asset management decisions. As modeling techniques continue to evolve in the asset management space, illustrated in our recent paper Macroeconomic Effects On The Modeling of Private Capital Cash Flows, their use as both an asset management tool and a risk management tool become more valuable.
The extreme importance placed on liquidity risk for all types of financial investments, and the financial community in general, to this point in time have been primarily associated with public investments. However, a burgeoning “secondary” market in Private Equity and Private Debt will change the liquidity consideration of this asset class, a better understanding of which is necessary for investment managers active in this space. Achieving this understanding will in turn provide private equity and private debt investment managers with another perspective with which to assess management decision aligning a bit more with that traditionally available for public investments. FRG is refining research into the liquidity of Private Capital investments through an appreciation of the dynamics of the environment to provide a better understanding of the behavior of these investments. Watch for more from us on this intriguing subject.
Read more about FRG’s work in Private Capital Forecasting via the VOR platform.
Dr. Jimmie Lenz is a Principal with the Financial Risk Group and teaches Finance at the University of South Carolina. He has 30 years of experience in financial services, including roles as Chief Risk Officer, Chief Credit Officer, and Head of Predictive Analytics at one of the largest brokerage firms and Wealth Management groups in the U.S.