Setting a Portfolio’s Long-term Illiquidity Budget

The top performing endowments and foundations generally exploit their long-time horizon with sizeable allocations to Private Equity, Real Estate and Private Debt, enabling them to harvest the illiquidity premium and greater alpha potential that we believe is inherent in these more inefficient private markets.

Given the higher expected risk-adjusted returns and the long time horizon of certain investors, there should be a bias toward maximizing the portfolio’s allocation to illiquid assets. This maximum can vary from 10% to 80%, depending on ongoing cash inflows, spending and other cash outflows, currency hedging, rebalancing liquidity and the interaction of the level of allocation with the liquidity needed to meet capital calls. Our scenario modelling tool enables the investor to arrive at the target that best suits their situation.