• As private strategies play a more prominent role in investors’ portfolios, many asset allocators are interested in what illiquidity discount they should command as compensation for tying up capital.
  • When investors commit capital to a fund with lockups, they effectively give up the opportunity to take advantage of future opportunities.
  • We take an alternative approach to assessing the illiquidity discount by modeling this opportunity cost.
  • The “optimal” illiquidity discount will compensate the investor for this opportunity cost.
  • The illiquidity discount investors should command will reflect their perceived skill and alpha-generating abilities.
  • We find illiquidity discounts on the order of 1.5%–2% per year are reasonable for most investors, but they are much higher for investors who are highly skilled.

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The Author

Jamil Baz

Head of Client Solutions and Analytics

Christian Stracke

Global Head of Credit Research

Steve Sapra

Client Solutions & Analytics

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Disclosures

All investments contain risk and may lose value. Equity investments may decline in value due to both real and perceived general market, economic and industry conditions, while fixed income or debt investments are subject to credit, interest rate and other risks. Private equity and private credit are considered speculative and may only be suitable for persons of adequate financial means who have no need for liquidity with respect to their investment and who can bear the economic risk, including the possible complete loss, of their investment. Investments in illiquid securities may reduce the returns of a portfolio because it may be not be able to sell the securities at an advantageous time or price.

Alpha is a measure of performance on a risk-adjusted basis calculated by comparing the volatility (price risk) of a portfolio vs. its risk-adjusted performance to a benchmark index; the excess return relative to the benchmark is alpha. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Hypothetical and forecasted performance results have several inherent limitations. Unlike an actual performance record, these results do not do not reflect actual trading, liquidity constraints, fees, and/or other costs. There are numerous other factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated or forecasted results and all of which can adversely affect actual results. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

References to skilled investors such as Warren Buffett is for illustrative purposes only and does not constitute an endorsement, authorization, sponsorship by or affiliation with PIMCO in any manner, and should not be construed as such.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the current opinions of the manager and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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