February 6, 2024

Liquidity - an Investor's Point of View

To elevate the private markets we need to view liquidity from an investor’s point of view.

Investors who choose to invest in these assets via the private markets understand that they do so for the longer term. There is no debate there. However, there is also recognition that circumstances sometimes change and they will take additional comfort if there is a mechanism to  be able to trade out of their positions if they need to - for numerous reasons beyond their control or influence:

  • Health and lifestyle needs, such as surgery, rehabilitation or retirement
  • Family needs, such as divorce, assisting children with their issues or needs 
  • Emergency housing repairs or renovations

Over recent years we have seen many examples of circumstances changing, sometimes abruptly. It could be a cyclone repair or other natural disaster costs, a serious career ending medical event and now, a cost of living crisis having major impact on cashflow. 

Or it simply could be recognising that the initial investment horizon has expired and the investor needs to rebalance a portfolio to reflect their stage of life.  

These factors represent the investors' lives and are a commentary on their need for cash, rather than a slight on the investment they wish to cash out of.

A lack of liquidity in the private markets

Liquidity options have been limited. A lack of technology has led to some trading managed via email and Excel with manual transactions that lack independence and transparency. There can also be a reluctance to offer liquidity in order to protect a business/fund's privacy or a perception that a trade might create a view of the underlying assets value rather than reflecting the individual investors circumstances. Despite fund managers knowing their investors and their intentions well, from the outside the perceived narrative of investors departing a fund can be negative.

Often liquidity mechanisms simply don’t exist and scenarios such as forced asset sales exist as a consequence. In economic downtimes, it becomes more common to see funds suspend distributions and /or redemptions. This makes for uncomfortable conflicts between investors wishing to redeem, those that wish to ride out the storm for the long term and the fund manager. A fund that offers investors liquidity can assist all stakeholders in getting what they want:

  • Exiting investor - receives their cash-out at a price they are comfortable with that reflects their circumstances rate, even if it is discounted
  • New investor - joins a previously closed fund, potentially at a favourable rate
  • Remaining investors - will not be disadvantaged by a fund selling assets into a potentially falling market in order to reinstate redemptions
  • Fund management - puts a thaw on the frozen redemptions/distributions

Offering liquidity to investors makes for good business, whatever the economic cycle: 

  • Giving outgoing shareholders a fair and transparent exit
  • Allow owners to sell down as part of succession planning
  • Bringing in new investors
  • Assist in the transition period to public listing
  • Better meet regulator and supervisor wishes by offering liquidity
  • Showcase the demand for the company funds and assets
  • Grow your pool of potential investors  
  • Avoid unattractive asset sales off the back of frozen redemptions

Syndex’s liquidity mechanisms

We offer liquidity mechanisms that allow peer-to-peer trading in a fair, independent, orderly and transparent environment. 

Continuous market: A self-service model whereby participants bid and sell when they like. Issuers support this facility by providing appropriate, continuous disclosure information to the market.

Periodic market: These trading events or auctions, open and close, within a defined period. An auction algorithm determines a single clearing price that determines the price at which the most trade volume will occur, and the least trade volume left unmatched. Set your invite list or open it up to a wider community. 

Offering liquidity calls for an issuers commitment to transparency. Secondary markets rely on the disclosure of both quantitative and qualitative information about an investment to inform market participants about the merits of that investment. Price discovery is a big part of this disclosure.

Liquidity is a perceived barrier to the flow of investor capital into private markets. Syndex has proved that it doesn’t have to be - we have numerous happy issuers and investors who have benefited from our tried and tested markets. With these dynamic approaches to liquidity, we all stand to benefit from a more efficient and transparent market. 

Want to know more?

Ross Verry

Ross Verry is CEO of Syndex and a shareholder. The views expressed above are purely his own. Please assess and research all your investment.

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