Mastering Illiquidity: Risk management for portfolios of limited partnership funds

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Investing in Illiquid Assets through Limited Partnership Funds

Understanding the key characteristics of limited partnerships is critical for effectively measuring and managing the risks of investing in private equity and real assets. In this chapter, therefore, we explain the basic characteristics of this structure, which has remained the most common form for long-term investing in these asset classes. As we shall see and also discuss in more detail in Chapter 5, the very features of this structure are essential to reap the illiquidity risk premium that private equity and real assets offer to investors. Limited partnerships have not remained uncontroversial, however, which explains why alternative investment forms have emerged, including listed vehicles, direct and co-investments, and deal-by-deal investments. However, notwithstanding its constraints, the limited partnership structure has stood the test of time and provides a superior framework for long-term investing, which is typically associated with a high degree of uncertainty.

4.1 LIMITED PARTNERSHIP FUNDS

Limited partnership funds are unregistered investment vehicles that pool capital for investing in private equity and real assets. These funds are set up by fund management companies – also referred to as “firms” – to attract institutional investors. Funds fulfil a number of functions. They allow the investment process to be delegated to fund managers, who have significant experience in screening, evaluating and selecting ...