Illiquidity, Institutions and the Promise of Access

Capital at Risk — Paper 05

I. Illiquidity and Institutional Design

Institutional investors do not treat illiquidity as a defect requiring concealment. They structure around it.

Infrastructure projects, private credit arrangements, commercial real estate and direct private equity holdings require time. Their value is realised through duration rather than continuous trading. The surrounding capital is therefore organised accordingly: commitments are defined in advance, withdrawals are restricted, and liquidity is managed at the total portfolio level rather than promised within each underlying holding.

This distinction matters. Liquidity is not required from every position. It is managed across the portfolio.

As Antti Ilmanen and others have documented, investors who accept reduced flexibility over capital may receive compensation in the form of higher expected returns or access to less competitive opportunities. The premium is not inherent to the asset. It is a function of structure and constraint.

That exchange only functions when the structure holding the assets matches the expectations of the capital providing them.

The tension is created when assets designed for patient capital are distributed through structures that preserve an expectation of access.

II. The Retail Translation

Over time, strategies historically associated with institutional portfolios have increasingly been distributed through vehicles designed for a broader investor base. The appeal is clear. Private assets offer diversification away from listed securities, exposure to long-duration cash flows, and access to areas of economic activity outside public markets.

The difficulty lies not in the assets themselves, but in the structure through which they are distributed. Investments that require patient capital are placed within structures that permit periodic redemptions despite holding fundamentally illiquid underlying assets.

During stable conditions, this distinction attracts little attention. Valuations move gradually, flows remain manageable, and the mechanisms supporting liquidity stay in the background.

When capital is committed with the expectation of illiquidity, temporary valuation uncertainty can be absorbed.
When capital is invested with an expectation of access, valuation uncertainty interacts more directly with behaviour.

Redemption becomes more sensitive to short-term conditions.

III. Structural Tension

Semi-liquid structures attempt to reconcile two characteristics that do not naturally align. The underlying investments require time to realise. The vehicle offers periodic opportunities to withdraw capital.

In stable periods this can appear durable. Flows remain balanced, liquidity buffers absorb ordinary redemption activity, and asset sales can occur gradually without disturbing valuations. Under pressure, the arrangement changes character. Redemption demand may rise precisely when the underlying assets are most difficult to transact. Liquidity is demanded at the same point that it becomes least available.

The redemption limits imposed by Blackstone’s BREIT vehicle in late 2022 made this visible. The fund held large portfolios of commercial real estate intended for long-duration ownership, yet capital had been distributed through a structure allowing regular withdrawals. When outflows increased, the monthly and quarterly redemption caps — rather than the expectations of investors — governed access to capital.

The underlying assets had not materially changed. Investors who expected access received a gate.

IV. Implication

Illiquidity is a structural feature of many assets. The question is not whether such assets belong within a portfolio, but whether the structure through which they are held matches the liquidity expectations of the capital providing them.

Where that alignment exists, illiquidity functions as intended. Where it does not, access remains available only until it is tested.