Mikael Huldt: Generally speaking, illiquidity premia is one of the places that long-term investors can go to extract value on a relative basis compared to liquid alternatives.
This is true for private equity compared to listed equity or private debt compared to traded bonds etc.
The question is whether they can provide a reasonable set of cash flows and this depends on what your definition of reasonably certain, but in today’s environment, with shorter holding periods and shorter durations, there is very high liquidity.
And it goes back to liquidity being pushed into the system by central banks through quantitative easing. One should expect cashflows to come back, but one should expect that in the future, durations and holding periods will be extended and it will be more normalised.
"In today’s environment, with shorter holding periods and shorter
durations, there is very high liquidity."
What you see in today’s environment should not be expected to be the form in the future.
Also, the ability to seek illiquidity premiums is not for everyone and investors should closely monitor and stress test their total exposure to illiquid investments.
Any gains generated through illiquidity premiums are easily eroded and more if an investor is forced to sell illiquid positions and the wrong time.
One needs to look at the underlying fundamentals of the investment strategies and see whether you are truly getting illiquidity premiums and what type of risk you are taking.
Some things are structured and packaged in a way to become illiquid whereas the underlying risks might be something completely different when you look at the performance drivers.
Mikael: There has been huge innovation in new strategies. And it has come down to whether you look at these strategies on an absolute return or relative return basis.
There are a number of strategies being launched today that are offered as being attractive on a relative basis.
You see this particularly with alternative credit because you can compare the returns that you can get in publicly traded or government bonds.
Also, with the current interest rates, on a relative basis, it is not too hard to offer interesting strategies that promote higher returns. The main question here is whether these strategies will be around once interest rates normalise.
Many people are looking for new strategies and structures that sustain investments. This is because the holding periods and durations have been shortened as generally there is a high churn of capital with a short payback.
This has meant that is has become very hard to stay invested and maintain exposures to alternatives.
"Evergreen structures are being launched both in private equity,
real estate and infrastructure."
On staying deployed, there has been quite a bit of innovation in terms of new structures. Evergreen structures, longer-term funds are being launched both in private equity, real estate and infrastructure, etc. And this does address the issue of staying invested for longer.
Also, an issue that is less talked about is that with the capital that is flowing into alternatives, it means that competition will increase, which should lower future expected returns.
And with lower returns being expected, these returns will be able to withstand a lower degree of transaction costs.
The historical model has been fundraisings every fourth or fifth year. But selling the underlying assets and raising these funds means that there are quite a lot of transaction costs involved that one needs to bear in mind.
If you could take these out of the equation, then it does address a vital point in terms of maintaining attractive absolute returns for these asset classes.
