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.
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.
Trade-Offs or Missed Opportunities?
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.
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.
“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.”
The IPO Effect
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.
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.
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.”
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.”
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, Lopefer sees it as a fair question. Similar questions are being asked regarding private credit investments.
“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.”
Secondaries May Have Natural Limits
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.”
“You’re going to take a haircut in the secondaries market,” Kloepfer says. “If you can do it, OK. But I know of some plans that looked at what it would cost during the financial crisis and decided they were going to issue debt instead.”
Bo Abesamis, an executive vice president and the manager of Callan’s implementation solutions group, adds that the ability to issue debt is only available to funds that can secure a strong credit rating.
“There are also questions about who [an allocator would] have to work with there, whether it is the state treasurer or another third party,” Abesamis says, adding that debt sales are not always a straightforward process and other options like peer-to-peer lending among institutions could make more sense operationally.
“The most important thing to assess is the cost of each facility,” Abesamis says. “There is always a cost, and that has to be balanced against your liquidity needs.”
Equity Market Concentration
Unprecedented levels of concentration within U.S. equity indexes are also weighing on investors, sources say. Some are asking whether the listed or passively invested portions of portfolios, often viewed as the most liquid, are now coming with extra risk.
“Equity market concentration has come up at more than a few client meetings,” Forestner says. “I think, frankly, if we had some more IPOs, that wouldn’t hurt, but it’s also not great if they all turn out to be volatile stocks. So there are some nuances there. We aren’t seeing major changes in portfolio construction yet, but people are keeping an eye on the risk.”
The challenge for institutional investors with equity market concentration is that no one wants to miss out on the next big run-up in growth stocks because they actively de-concentrated their portfolios. De-concentration also typically means investing globally, and that might be a tougher sell given current geopolitical concerns and because sticking with U.S. equities is working for investors. But, similarly, no one wants to think about what happens if that trend changes.
“Historically, extreme concentration is unwound through trauma,” Kloepfer says.
A Core Consideration
As access to private markets expands, institutional investors could see a further evolution in liquidity tools, along with portfolio liquidity in general. Adding investors from the retail and retirement plan markets, who also want regular liquidity, could push the industry to evolve. Evergreen funds have been the first step but have hit some growing pains recently. GP-led solutions such as continuation vehicles and net-asset-value loans are also likely to play a bigger role if slower exits become standard practice in the markets.
“I think all of these tools are here to say,” says Bruce Ingram, a partner in and the global head of private equity at Aon Investments. “But I think they have to be evaluated with eyes wide open about what the real liquidity is and what the terms are. Some of these things, like NAV lending, are the definition of financial engineering.”
There is also the potential for tools, such as evergreen funds, to lead to strategy drift within private equity if the managers overseeing those funds are putting in assets that they want to hold for much longer than a typical 5-to-10-year fund duration.
“The question that needs to be asked is, ‘Why are you putting certain assets in that specific kind of portfolio?’” Ingram says. “Investors have to be able to assess the risk and the performance. This is also true for how liquidity gets managed. What is the fund using? Cash? Stakes? Other securities?”
In a recent article, Christian Munafo, a portfolio manager for private growth equity at VanEck, says he anticipates private markets will become a core portfolio consideration for all types of investors. When that happens, it is likely to put an even bigger focus on the questions raised by Ingram.
“We’ve been in a liquidity constrained environment for several years now, and I don’t anticipate that’s going to change,” Munafo says. “It’s nice to see more IPOs, it’s nice to see the emergence of tools like evergreen funds, but there is still some rate sensitivity there, and both can be sensitive to the market environment. LPs get frustrated in these conditions, employees at companies get frustrated in these conditions, because they can’t sell shares either, right? Adding more investors amplifies all of that. But it can also put more emphasis on finding solutions.”
Tags: distributions, initial public offering, investment return assumption, Liquidity, market volatility, Private Markets, Risk Management