Redemptions and limits on liquidity

Covid resulted in a liquidity crisis in March 2020, though not to the same level as occurred after the 2008 global financial crisis. Of course, market illiquidity can also offer opportunities, with the potential for investors that have sufficient financial resources to enter the market and buy distressed assets with greater fundamental value than their fire-sale pricing. At the start of 2021, transaction activity was slow. “Exit activity is still lagging,” says Matthias Reicherter, Managing Partner and CIO, Golding Capital. “Liquidity out of the private market has been reduced. We hope that 2021 exit activity will bounce back.”

For open-ended and semi-open-ended funds, quarterly redemptions are the most popular redemption periods.

NAV suspensions have brought into focus how managers deal with redemptions in private funds investing in illiquid assets.

Many of the Sample Funds do not need to hold high levels of cash as they do not have regular redemption dealing dates. However, for those funds which offer regular redemptions, managers have had to manage liquidity by a number of methods including carrying large amounts of cash (and near cash) and in a low interest rate environment, they have found themselves under pressure for returns.

In some cases, even funds with cash / near cash in the region of 20% struggled to meet redemptions and gated nonetheless when under stress. The UK’s FCA has consulted on possible ways of addressing this structural mismatch including a proposal to require investors to give longer notice periods before their investment is redeemed.

The regulator argues that this could deliver an increase in returns to property fund investors due to the funds operating in a more stable and sustainable way, with more assets invested in property and less in cash.