The shift from liquid to illiquid assets poses risks for investors

Investors have been increasingly allocating capital to illiquid assets, such as private equity and private credit, which are not marked to market. This has created a potential problem, as the true value of these assets may not be accurately reflected in portfolios. Investors have been attracted to illiquid assets due to the assumption that interest rates will remain low or follow historical levels, as well as the accounting advantage of having non-marked-to-market assets that appear to lower overall portfolio volatility. However, when these illiquid assets need to be redeemed or rebalanced, it can create challenges, as demonstrated by recent examples in Australia and the UK. Additionally, the growth of non-bank financial institutions holding these illiquid assets could lead to future financial crises, as these institutions may lack the risk management capabilities present in traditional banks. The risk lies not only with the managers of illiquid assets, but also with the investors who have allocated a significant portion of their capital to these assets.