Private markets and illiquid investments are gaining in popularity, but Ashby Monk, executive director of Stanford University’s Global Projects Center and columnist for Institutional Investor warns in a March article, “I’ve found that almost all Giants [large sovereign wealth funds and pensions] are underprepared. I’ve learned that though investment teams may be passionate about illiquid assets, there has not been a commensurate focus by boards of directors, risk teams, and operations teams on illiquid risks.”
He goes on to explain most of these investors don’t understand what a fair return should be for their illiquid investments because most are not correctly assessing their liquidity risks.
“If you don’t have liquidity when you need it, you can end up defaulting on commitments,” Monk notes. “At a high level, the current focus on illiquid and alternative assets is great. But it has to be combined with good governance.”
In other words, illiquid assets can be a double-edged sword — if you plan well and anticipate future needs without having to sell at an inopportune time, these investments can deliver as promised, but if not, Monk writes, they can be dangerous to a portfolio.
