Illiquids, Are They Really For Ever? – The Latest Linchpin Salon Discussion

We held our third Linchpin Salon discussion in the spectacular Council Room at King’s College, London on 16th July 2025.  We were also joined by over 20 participants on-line.  The subject, ‘Illiquids, For Better Or For Worse?  Are They Really For Ever’, was prompted by the pressure governments are putting on pension funds to invest in various kinds of illiquids just when some of their fundamentals are being questioned.

The session was hosted by Aoifinn Devitt, and the panellists were:

Amy Flikerski, CPP Investments (Canadian pension fund)

Betty Carey, Independent Adviser to LGPS Funds

Crawford Spence, Professor of Accounting, King's College, London

Nick Spencer, Senior Consultant, Milliman UK (who bravely stepped in at the last moment)

Have we reached ‘Peak PE’?

We started off by identifying two major but connected trends: the decline of active management within public markets, and the growing momentum going away from them towards private markets.  Starting with Private Equity (“PE”) we explored some of the reasons and asked who really captured the returns.

We noted how some investors, such as the Middle East Sovereign Wealth Funds and the Maple 8 in Canada, have embraced PE more than others such as those in Scandinavia.  Some long-term endowments have allocated as much as 60%, so in the light of increasing headwinds there should be no great surprise that they have recently been selling to right size their weightings.  One panellist commented that PE ‘was the golden goose, but is no longer’.

There were mixed views on whether PE had really outperformed when cashflows were benchmarked using public markets.  One experienced audience member said that the outperformance had been of the order of an annualised 5% over 16 years, but in contrast a panellist believed that investors had been able to generate equivalent returns from public equities.  There was agreement on the need to select managers well.

One panellist spoke about the ‘ebbs and flows’ of returns and believed it was critical to lean in or away from at the right times.  Right now, he noted that distributions as a percentage of total assets had been falling for the past 3 years and were less than half those in the good times.  

Another spoke about managers’ preference for private ownership over public, which he believed was a reason for being optimistic.  He outlined how the eco-system has changed from one where financial engineers (corporate raiders for want of a better term) and industry agglomerators added value.  Today shadow owners whose main objective is to gain access to the fee streams generated by PE are dominant.  Another panellist emphasised how these huge owners operate across the private markets spectrum, and not just in PE.

Evolving ways General Partners have provided liquidity

We went on to discuss GP-led secondaries as mechanisms to deliver liquidity.  We distinguished continuation funds where there was a good reason for extending ownership of the asset from those where the GP was simply unable to sell them.  The panel saw NAV lending as simply another form of credit, another example of the gradual convergence of public and private markets.  Not for the only time during the talk, the phrase ‘sunlight is the best disinfectant’ was used in the context of GP-led secondaries i.e., the need for all parties to be properly transparent.

A panellist asked why GPs felt the need to provide liquidity via NAV lending when asset owners can provide credit more cheaply.  It may help internal rates of return but is not rational.  In the old days convertible bonds were solutions.  Today liquidity and leverage are connected, as was shown most starkly in the 2022 LDI crisis.

We talked about the ‘ever-green’ funds: here the panel did not believe they would be able to provide the liquidity which they promise, though we noted that was probably just as true of some public markets too.  However, they do provide some diversification benefits when combined with a public portfolio.

What Returns will Investors Get From Private Credit

We then switched to a discussion about Private Credit (“PC”).  The general view was that there was plenty of demand for both sponsored (i.e., lending to firms sponsored by PE) and other types of lending.  The question as ever is what returns investors will get.  The panel suggested PC return premiums will increasingly be restricted to more complex types of lending, and plain vanilla private credit returns will converge with those in public markets.  The premium is more one of complexity than illiquidity.

A challenge came from the audience whether private credit could ever replace banks, because they could only lend the capital they raised, and all money creation ultimately comes from banks.  The panel disagreed, believing that institutional investors would continue to increase their size and PC allocations, and so there would be new capital available.

Another member of the audience suggested that the root of the problem was the non-functioning of public markets.  They have failed in two important functions: they no longer act as a source of new capital or as a means of price discovery.  The rise of passive investing is undoubtedly one, if not the only, culprit here.  As a result, companies needing finance are forced to go to private markets.  But valuing private assets accurately is extremely difficult, as another audience member pointed out, which is why the failure of public markets to deliver price discovery is so important.

LGPS and Local Investments

We moved onto on how the Local Government Pension Scheme (“LGPS”) could meet the Government’s aspirations to invest locally.  The scale mismatch is an obvious problem, and one panellist commented trenchantly on how the push for consolidation makes it more difficult for local administrations and pension funds to work together.  Where are the regional banks, or the regional stock exchanges, he asked?

Following on, the panel received a direct question about the Government’s plans: ‘Is it going to work?’  The response was ‘Not in the way they would like it to’ largely for reasons of scale mismatch.  The panel thought there was more likely to be funding for large infrastructure projects than small local investments.  But even here, the problem is as much the lack of a pipeline as the lack of money.  

The more cynical view is that the Government just wants somebody else to blame if it goes wrong; and one panellist pointed out the contradiction between the need to take risk, and all the ‘safety cars’ which pooling and consolidation bring.

Are future return projections too optimistic?

The final question was whether expected returns from private markets today, described in the meeting as ‘lies in the past projected into the future’, are too optimistic.  The response from the panel was that it was impossible to predict future returns, and it is more important to focus on a reasonable entry point and a resilient portfolio.  But that simply brings us back to the difficulty of valuing private assets accurately in the absence of a functioning public market.

Summary

We covered a lot of ground in this discussion.  The main takeaways were:

• Private markets will continue to gain ground in portfolios

• Private Equity has moved away from its more active and dynamic origins to become a long-term fee-capturing machine

• The failure of public markets to act as a source of capital and a mechanism of price discovery should be flashing red lights to everyone

• Anyone who can find a way to value private assets accurately will have a good business

• Investors should choose their entry points carefully and not necessarily follow the crowd

I will end by trying to answer the question posed in the title.  Even if they are not there “for ever”, private markets are clearly not going to go away any time soon.  But the return premium for illiquidity may have disappeared: investors should not automatically assume that they will get returns any higher than the public markets unless they are prepared to take more specific risk.  And of course the fee levels are multiples higher.