It’s a Great Time to Be a Liquidity Provider

On the surface, it might look like a less-than-ideal time to invest. Equity markets have been on the rise and no one — especially savvy investors — wants to overpay for an investment. Even though more traditional assets may seem expensive, there is cause for optimism, if you know where to look. “There are still plenty of opportunities in private markets, due to the fact that some investors are liquidity constrained and need a cash infusion,” says Jay F. Karpen, Vice President and Portfolio Manager at Whittier Trust. Here are three ways to capitalize and navigate these types of investments. 

Secondaries: Providing Liquidity in Private Markets

Very simply, secondaries are instances where you purchase someone else’s interest in a private equity or venture fund, often at a discount. The current environment is ripe for these opportunities because, over the past few years, investors over-invested and over-committed into private equity and venture capital, and now they need liquidity. “This is creating a phenomenal opportunity for buying secondary interests and resulting in large discounts in pricing,” says Karpen. He explains that discounts with high-quality private equity funds can be 10 to 15% and second-tier funds could be available at 15 to 25% discounts. An even bigger opportunity? Some secondaries in venture capital can be available for discounts as high as 50%. “It’s a very attractive market that exists because in 2021 some people and institutions over-invested in private equity and venture capital with the expectation that they would see distributions in line with historical patterns,” he explains. Instead, fund distributions have fallen precipitously due to the tepid IPO market and a decline in mergers and acquisitions. Such situations create opportunities for investors with cash on hand. 

There’s no widely publicized market for these kinds of investments, so it pays to have a trusted family office or client advisor who has access to high-quality managers who specialize in secondary investments. Another advantage? “A high-quality multifamily office is often able to access these managers at lower minimums that otherwise wouldn't be possible if you tried to go direct,” Karpen says. 

Capital Solution: Providing Liquidity to Companies in Need of Capital

“There are a lot of good companies that are finding themselves with bad balance sheets simply because they need to refinance or they have floating rate debt and now, with spiking interest rates, their debt is expensive,” says Karpen. While this situation is less than ideal if you’re a business owner, it can be a terrific opportunity if you’re a would-be liquidity provider looking to make an investment. 

Another factor complicating the landscape for businesses is that, following the collapse of Silicon Valley Bank and First Republic and increasingly stringent lending standards, some banks have pulled back from lending, creating a tremendous opportunity for private credit managers. A year ago, a company might have been able to borrow at 7% and now they might be looking at over 12%. There is a huge opportunity for private lenders to fill that void and be compensated with higher yield, lower leverage and better covenants.

Real Estate: Providing Liquidity to Distressed Sellers

In recent years, some investors purchased real estate with floating rate debt and, with the recent interest rate hikes, they are now getting squeezed. This presents opportunities to buy assets from distressed sellers in the real estate market, often at deep discounts and sometimes with guaranteed tenant lease escalators. “We’re already seeing some opportunities in the triple net lease space that are very attractive,” Karpen says. For Whittier Trust clients, there are generally two ways large-scale real estate deals can happen. The firm might do direct real estate deals and then syndicate them to clients. Alternatively, they may choose to partner with a manager who is constructing a diversified portfolio of real estate. The firm looks at each potential opportunity individually, evaluating the advantages, tax implications and more to target the best investment possible. 

Don’t Go It Alone: Find The Right Advisor

Being a liquidity provider in less traditional investments takes insight, research and due diligence, which is why having a partner like Whittier Trust makes sense for high-net-worth individuals and families. “We have clients who are anxious about putting money into equity markets because they see valuations at elevated levels and there’s some market uncertainty,” Karpen says. “By being a liquidity provider, with the right guidance and access, our clients have the opportunity to buy high-quality assets at discounted prices.”