Incorporating illiquidity into your portfolio

David Barnard The way private market investments ultimately impact a portfolio really depends on the types of investments that are chosen, which really is working backwards from what are the overall goals of the portfolio in the first place. There's opportunities to enhance returns with earlier-stage private equity investments such as venture capital. There's opportunities to enhance the income characteristics of a portfolio with things like private credit, and some combination of both of those, as well as things like real estate and private equity themselves can be diversified because private markets will look at and consider a much broader opportunity sets than just the public markets themselves. Now, of course, there's trade-offs to all of that, namely in the form of liquidity, which needs to be planned for in terms of both an asset owner's need for capital but also just the management of capital calls and distributions.

Chuck Davis Alternative assets and private markets are illiquid places to invest, and they require people to put money up and not be able to get out of it a week later and have to hold for a long time.

Gideon Berger Depending on your need for access to your own money. That can pose a challenge or an issue. Right. I mean, so I think that, you know, one thing that's unique about certain types of institutions, let's say a pension fund, for example, they have a very clear understanding of their liabilities. When are they going to have to pay out certain amounts of money to pensioners and they can build a long-term schedule of that and say and know when I need my money? Individuals, that's not always the case either because of need, I don't know. I lose my job, and I have a health issue that require whatever or so something bad happens or something good happens. Like I get an opportunity to buy my dream house or whatever it is. But so the biggest thing is there is certainly illiquidity.

Chuck Davis Historically, people who have good wealth but not excess wealth have not invested, but they will now have the opportunity. And the criteria is that it has to be somebody who understands that liquidity comes at a cost when you can buy and sell a stock every day, you have to pay a premium to do that. When you can't, that illiquidity gets you a better deal, but you have to be able and willing to hold it for several years and you have to find a manager that you trust that's aligned with you, that has their own capital next to you, that has a long, consistent track record and a solid team and a lot of human of knowledge to be able to compound your money and give it back to you in three, four or five, eight years. And if you haven't got that kind of patient capital, it's probably not a great investment area for you.

Hemant Taneja I think it's two tiers of portfolio construction. One is what percentage do you want to be in the illiquids? And if you think about the endowments, they probably typically think about that's like 15 to 20% of their holdings. But then you can also think further from that to say what stage of illiquidity is that? You can invest in firms that are doing super early work and that's going to be illiquid for a decade. Or you can invest in firms that are doing technology growth investing, and that starts to be liquid in a couple of years. Or you can actually go find platforms that do all of that and sort of blends you into having a nice mix. So I think it's a it's a set of choices that are highly personalized, but that would be the framework I would use to think about it.

Gideon Berger If this is my day one, you know, entry into these illiquid investments, and I conclude, hey, there's 20% of my money that I'm not worried about being illiquid or 30% of my money I'm not worried about being illiquid. That doesn't mean I would go out and try and allocate 20 or 30% because I would have a notion of wanting vintage diversification over four or five years. So, I would think about of what my total is, okay, my goal is to put out 20% this year and then 20% next year, and then 20% the following year, etc.. And by year five, when I'm putting put out another 20%, there's hopefully some stuff coming back from year one. And, you know, you rinse and repeat. So it's a very personal decision how much you really don't have access to it. So what does that mean to you? And then spread out your investment horizon in terms of the pace in which you allocate.