Private credit and the illiquidity premium

The sector now offers equity-like returns with lower risk. But manager skill is critical

Leonardo Drago

Published Mon, Sep 11, 2023 · 4:45 pm

Weakness in the commercial real estate market continues to put pressure on banks. Lending to small and medium-sized companies as well as those looking to refinance commercial properties has dried up. Private credit has stepped in to fill the gap.

PHOTO: PIXABAY

This Time is Different

I HAVE not been a fan of illiquid investments, and that’s putting it mildly.

I’ve argued before that liquidity is the most under-rated quality of an investment. In every crisis, fortunes are lost due to illiquidity. Leveraged real estate, businesses, and private equity (PE) investments all require additional cash liquidity to pull through an economic crisis.

In Asia, investors typically hold less than 20 per cent of their total net worth in liquid investments, and, in many cases, less than 10 per cent. In a crisis when prices of investments fall precipitously at the same time, 10 per cent to 20 per cent of liquidity will never be able to support the cash needs of the balance of 80 per cent...