Investors accept illiquidity when they are compensated with higher expected returns and when the lock-up matches their cash flow calendar. Problems arise when illiquid holdings sit inside structures marketed as daily redeemable, or when liquidity stress appears first in price gaps rather than calendar gates.
Symptoms we see in portfolio reviews
Hybrid exposures, private credit sleeves in listed wrappers, and unlisted property trusts with vague redemption policies often share a feature: they behave like equities in downturns but like fixed income in marketing materials. Clients discover correlation when they need cash, not when conditions are calm.
Our view
We classify every holding by days-to-cash under stressed assumptions, not prospectus labels. If an asset cannot realistically be converted to cash within the client’s IPS liquidity window without material price concession, it is tagged illiquid and capped separately from listed equities. That cap is non-negotiable unless the IPS liquidity horizon lengthens in writing.
We do not argue that illiquid assets are inherently bad; we argue that unpaid illiquidity—risk without documented return target and without matching liabilities—is a governance error.
Questions for investment committees
- What percentage of NAV must settle within 30, 90, and 365 days?
- Who approves breaching illiquid caps?
- Are gate events modelled in cash flow stress tests?
See portfolio services or contact us.