1. The Investor Ecosystem:
1.2 Asset focus
While some of the discussion in this report will be of relevance to traditional asset classes, the focus is on illiquid assets: real estate, infrastructure equity, private equity and emerging alternatives (including infrastructure debt). Illiquid assets are the largest portion of assets commonly referred to as “alternative investments” (Figure 1). There is no focus on hedge funds since investments in these funds are generally more liquid.
With illiquid assets, the role of third parties tends to be most intense, and the perceived benefits of direct investing and the associated complexities in obtaining them are greater as well. Moreover, illiquid assets have accounted for an increasing proportion of institutional investment portfolios since the 1980s, making questions about how illiquid assets are managed of increasing interest (see: potential benefits to asset owners from illiquid investments).
Potential benefits to asset owners from illiquid investments
There has been a steady increase in interest in long-term illiquid assets by institutional investors.6 Potential benefits for asset owners of long-term investing in illiquid assets include:
• Accessing structural risk premia
Investors may be paid a premium for accepting intermittent asset price volatility and for accepting the liquidity risk inherent with long-term investment markets.
• Accessing opaqueness and complexity premia
The low volume of deals in illiquid markets makes it difficult for most investors to assess the correct market price. Conversely, it may reward the investors who have the skills to structure a viable deal based on their expertise in the asset class and the network of service providers and investment partners.
• Timing advantages
Long-term investors can wait more patiently for market opportunities before investing or selling, as well as invest early in broad trends (e.g. growth in emerging markets, rise of the middle class), even when the timing of the impact of specific investment trends remains uncertain.
• Avoid buying high and selling low
Sentiment is such that investors are often tempted to buy when markets are bullish and to sell when they are near a low point. Long-term investors have the mindset and structure to stay in the market and avoid the potential losses from buy and sell decisions driven by short-term pressures.