Illiquid Assets, Market Size and the Investor Base

In setting the scene for this book, this chapter starts by defining the universe of illiquid assets. Specifically, we stress the structural nature of illiquidity as the major defining characteristic of the asset classes we cover in this book, as opposed to asset classes that may become subject to cyclical market liquidity breakdowns in periods of financial stress. This definition limits our focus to private equity and real assets consisting of real estate, infrastructure, oil and gas, and forestry.

The most common form of investing in private equity and real assets remains the limited partnership. As we discuss in greater detail in Chapter 4, limited partnership funds provide a particularly appropriate framework to harvest the illiquidity risk premium these asset classes offer. Specifically, fund structures allow the use of a common risk measurement and management approach that can be applied across different asset classes. Between 2000 and 2011, around USD 4 trillion were committed to private equity partnerships and funds targeting real assets. While this amount may seem small relative to investments in traditional asset classes, such as public stocks and bonds, we show in this chapter that illiquid investments represent a sizable share in the portfolios of some investor classes, especially those who are less constrained by their liabilities.

In the final part of this chapter, we look at recent trends in the community of long-term ...

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