Liquidity Issue and its Silver Lining
I would like to bring your attention to two observations that happened in the last month of 2022 which are very difficult for financial market practitioners NOT to be aware of.
1) Unlisted REIT managed by one of the largest asset managers on the planet limited the withdrawals by its client after?redemption requests?hit pre-set limits.
2) The recent recession caused by (i) a supply chain disruption and (ii) increasing interest rate because of inflation have not only impacted consumers' spending sentiment but there has also been material impact across LPs commitment. According to industry research, the amount of time it was required to fundraise for a fund has reached a peak of an average of 21 months from first to final closing. The time required is even longer than during the worst period of the global financial crisis back in 2008!
The above-mentioned two incidents show that liquidity for GPs are getting difficult to come by because:
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a) investors prefer liquidity by allocating their capital to assets (e.g. deposits. Yes! Deposits!) with high liquidity rather than having their capital tied-up in relatively illiquid assets with fixed-income characteristics like unlisted REITs; and
b) major LPs are getting cautious in terms of deploying capital to GPs and small(er) GPs without bankable track records or strategies that can withstand the recession will have very difficult time doing fundraising.
HOWEVER
On the other hand, I have also seen both financial and strategic investors focusing on transactions that can create value to their existing businesses and/or portfolio companies. For example, major GPs and incumbents in certain industries are looking at small(er)-ticket investments in deep tech companies with the aim to create value for its existing portfolio companies or upgrading their product offerings.
This shift in strategy has become a silver lining for investors (or incumbents) with (i) a need for deep tech and (ii) the ability to execute on a deal decisively, to generate exceptional return for their organizations under such challenging moment.