Liquidity: it is an important element for every manager of alternative assets funds, but it can often be the most challenging type of service to provide. Alternative funds, like private equity, private debt, private real estate and fund-of-funds, are usually structured as illiquid investments. This issue of providing liquidity is compounded for investment advisors who manage funds where high net worth individuals and small-to-mid-sized institutions make up a substantial portion of their investor base, since so few liquidity providers service these type of investors. In this quick guide, we will discuss three hypothetical scenarios that might prompt an investment advisor to seek liquidity for alternative assets and provide an overview of possible challenges.
Countless issues can contribute to an investment advisor needing to seek liquidity to manage a fund heavy in alternative assets. For example, while the COVID-19 pandemic sent many industries reeling in 2020, the health technology market boomed, nearly doubling venture funding raised in 2019. If this spike turns out to be a long-term opportunity, as many experts suggest it will, the manager of a health tech-heavy fund may be called upon to provide liquidity to investors who want to exit multi-year investments. In cases like this, a few different solutions might make sense.
Private fund investment advisors are driven to achieve specific performance targets, from internal rates of return to multiples, with the unifying goal being to extract as much value out of every investment to make financing the next fund easier. This process sounds straightforward, but in the real world of alternative assets, finding the liquidity to build capital can be difficult, especially if all Limited Partners (LPs) have been exhausted. Solutions for this challenge to asset liquidity depend on the advisor’s additional goals. For example, if they want to raise flexible capital without impacting the fund’s structure or permanently giving up equity, the solution might focus on maximizing the liquidity of the carry.
Additionally, one of the main objections for new prospective investors coming into a fund is their discomfort with a long lock-up. At Ben, the Preferred Liquidity Provider Program was developed to address objections like this one. Incoming investors will have the reassurance that there will be a standing bid for their assets and a new investor may take over their LP position within the fund.
Private fund managers understand that the need for liquidity underlies nearly all investment portfolios. That urgency for ready cash intensifies when the portfolio at hand includes alternative assets. To best serve clients’ objectives, investment managers in the secondary market can tap into several liquidity options. Net asset value-based (NAV) lending solutions, for example, can provide fund financing without resorting to forfeit of equity or revenue sharing. Strip deals, which broadly refers to the process of generating liquidity by stripping certain assets from a fund, are a less common solution that offer investment advisors the ability to divest a fund of less desirable assets and gain the capital needed to better manage the fund.
Common Challenges in Asset Liquidity
The need for liquidity would not be as urgent if it were easy to acquire, and most fund managers are familiar with some of these hurdles:
- Inaccessible. GPs who manage alternatives-heavy portfolios understand that liquidity can be difficult to obtain, especially if the funds are being managed for individual investors and small-to-medium institutions.
- Slow. Especially in the case of alternative assets, generating a viable liquidity option can be a months-long process.
- Rigid. Limited options in liquidity providers mean that many GPs cannot meet their clients’ investment objectives.
At Ben, we have crafted a suite of reliable, ongoing liquidity solutions that addresses the challenges faced by GPs. Our process allows investors to access hard-earned investment capital, with liquidity provided from our own balance sheet. Contact us today to schedule a consultation with our expert team