The illiquidity premium and its exclusive beneficiaries

This article appeared originally on 'What Investment' on 27th June 2022 here: The illiquidity premium and its exclusive beneficiaries (whatinvestment.co.uk)

Blackstone’s 2021 results surely sparked envy among some. “A remarkable finish to a record-breaking year,” hailed Chairman and CEO Stephen A. Schwarzman as assets under management rose 42% to $881 billion.

I bring this up because Blackstone’s results offer a useful point of comparison. Scroll down a few pages to its investment performance and you find that its opportunistic real estate investments rose 43.8% last year; corporate private equity was up 42.2%; while secondaries rose 49.8%. Not too shabby.

With that in mind, let’s also consider last year’s boom in the public markets. The FTSE 100 had its best year since 2016, rising 14.3%. Across the pond, the S&P 500 returned 26.89% in what Wells Fargo described an “exceptional year for US equity markets”.

These are strong figures, but they pale in comparison to the rewards Blackstone’s investors reaped. And therein lies the problem. Blackstone’s investments in industries such as real estate lock investor capital into hard-to-sell assets but, in return, open them up to strong returns. The hefty minimum investment their funds require effectively exclude the average man on the street from participating in these sectors that outperform public markets.

The most common way for people to access the sector is through FTSE-listed REITs. But while these companies invest in real estate, they are also at the mercy of the vagaries of the wider stock market.

The winds of market sentiment blow equities up and down regardless of sector, diluting the inherent advantages of property investment: secure, non-correlated, income-driven returns.UK listed REITs with a market capitalisation above £1 billion have shown beta figures to the FTSE All Share index (on down days) of 0.93 and 0.94 over the last five and 10 years respectively.

Put another way, on average over the last 10 years if you owned shares in a large, liquid, £1 billion plus REIT in the UK, for every 1% the stock market fell your REIT’s share price would have fallen by 0.94%. That does not represent a good alternative investment.

Real estate’s illiquidity can also present a challenge where investors can find themselves tied into an asset for years, unable to release their equity or easily move into another listing that better matches their risk and return appetite.

But what if we could turn that proposition on its head? What if we could give retail investors an accessible route to the types of illiquid assets that drive Blackstone’s returns?

There are some vehicles – for example Moonfare, the technology platform that enables individuals and their advisors to invest in top-tier PE funds – who do that in the private equity space. They take an interest in a fund with a minimum ticket size of, say, $25 million and split it down to smaller chunks, thereby widening the potential pool of investors. Similarly, IPSX opens up commercial real estate investment to those who would otherwise be on the outside looking in, enabling the buying and selling of shares in property assets which would be otherwise unobtainable in the traditional market.

The fact is there doesn’t need to be such a wide gulf between returns, and we need to see more of these types of disruptors to broaden the opportunities open to the large majority without sufficient capital to play at an institutional level. Investments accessible to the man on the street don’t have to underperform institutional funds by 20 percentage points despite having an “exceptional year”.