Devising a new liquidity paradigm

Asset managers are establishing fund ranges that offer clients access to both liquid and illiquid strategies. While unlocking commercial opportunities, moving up and down the liquidity spectrum can create operational complexities.

In order to diversify returns and appeal to new groups of investors, traditional and alternative asset management firms alike are launching an ever-wider gamut of fund strategies. The offerings are often far removed from their original flagship products.

"This sort of hybridization or convergence can be quite appealing for fund managers, but only if the offerings are on-boarded and administered correctly," says Craig Williams, Head of Product for Private Capital Services at RBC Investor & Treasury Services.

1. Illiquidity correlates with better returns

Frustrated by market volatility and soaring inflation, a number of long-only managers are now looking to capture the illiquidity upside by establishing private funds.

Major traditional players are looking to optimize their returns by developing multi-asset private capital solutions

Private markets have delivered significant returns over the last decade. Take private equity, which generated a pooled internal rate of return of 27% in 2021, making it one of the best-performing asset classes in the private markets universe.1 At the same time, private debt—owing to its diverse range of sub-strategies—has also proven resilient amid the various macro headwinds.2

“A lot of the major traditional players are looking to optimize their returns by developing multi-asset private capital solutions, whether it be private equity, infrastructure, private debt or real estate," says Williams. "Conversely, some private capital managers are further diversifying their offering by setting up alternative investment schemes that include different fund and corporate structures,” he adds.

2. Laying the foundation for a larger investor base

Hybridization can be a useful tool for asset managers to attract new clients—irrespective of their liquidity profile. For instance, there is a growing legion of private capital managers that are manufacturing more liquid products as they look to tap into the retail and affluent investor market; this is in addition to their more traditional institutional clients. Other managers are developing investment vehicles that lie somewhere in the middle of the liquidity spectrum. Examples include open-ended funds with monthly or quarterly liquidity terms, or closed-ended funds with limited redemption windows.3

“Rising interest rates and inflation—along with some of the other global geo-political challenges—are prompting investors to ask for greater liquidity in their fund structures. We see these requirements in the funds that we are onboarding," says Williams.

3. Hybridization unleashes operational complexity

While hybridization has many benefits, managers do need to be aware that transitioning into new strategies can bring about operational challenges. Long-only managers moving into private markets, for example, are likely to find themselves dealing with unfamiliar practices such as carried interest calculations and distribution waterfalls. In contrast, private capital firms building a more retail-orientated product will need to come to grips with unfamiliar distribution channels and liquidity structures.

Onboarding is likely to be a significant logistical undertaking

"Typically, private capital firms will have commercial relationships with just a handful of large clients, but retailization could result in this becoming thousands of clients accompanied by a reliance on key distributors. Onboarding such a large number of retail investors, while simultaneously conducting due diligence on each of them, is likely to be a significant logistical undertaking," says Williams.

Asset managers will need to address these challenges, either by hiring the right people internally or working with suitable third parties such as distributors, depositaries, custodians and administrators. Williams adds:  "In order to ensure liquidity, private capital funds may need to obtain credit lines from their banks or hold surplus cash to meet client redemption demands in some of their more liquid structures."

4. Outsourcing is one way for managers to navigate the challenges of hybridization

As managers' operational requirements become increasingly complicated, many are having to invest in their internal systems and processes. Alternatively, some firms—reluctant to incur the added operational costs in an inflationary environment or simply because they are unable to recruit talent owing to the chronic labour shortages—are turning to third-party vendors for support.

"Managers running multiple strategies need to be selective when choosing their vendors and ensure that service providers can support them across multiple asset classes, whether it be open-ended, quasi-open-ended or closed-ended fund structures," says Williams.

You may also like


  1. McKinsey & Company, McKinsey Global Private Markets Review 2022, March 2022
  2. Ibid
  3. Schroders, The democratisation of private assets, March 15, 2022