Coronavirus, capital calls and liquidity in private market investments
BY Yaelle Gang | March 31, 2020
In the current market environment, liquidity is top of mind for pension plans, says Jason Campbell, principal at Eckler Ltd.
For example, despite a company’s potential work stoppages, it’s still responsible for benefit payments, as well as paying capital calls on investments as they come due.
Some firms in the private markets space are trying to be accommodating, Campbell says. “We’ve talked to firms who, if they could do so, are delaying capital calls and not trying to compound the challenges for plan sponsors.”
However, other firms are compounding the illiquidity by making capital calls. And not all of these calls relate to investments, but rather to shoring up their own liquidity at the expense of others, he adds.
Raising capital at the last minute has proven very expensive and challenging. “You can sell assets, it’s just hard and costs a lot at this point in time,” says Campbell. “We think it makes a lot more sense to try to, if you can, raise that capital a little bit more slowly over a period of weeks, . . . giving investment managers who you’re deeming from an opportunity to trade not just on one or two days, but over the course of several weeks where they can opportunistically take advantage of little pockets of liquidity as they find them.”
Some of the bigger pension plans can be liquidity providers if they can get deals done at the right price, but small to mid-sized plans don’t have that opportunity. “They’re not trading in the markets in and out every day. Of course, they do expect that their investment managers have that capability and will hopefully be able to manage that and help offset some of the costs for them.”
While there isn’t a lot of liquidity and it’s expensive, some opportunities are presenting in areas like private debt and the secondary market, says Campbell. “We hear more and more deal flow popping up. And I think, in both of those cases to a big degree, that is tied to the earlier comments about liquidity and needing to source some of that. That’s probably the spot where you can be a provider of liquidity and end up with some good underlying investments.”
However, in the real assets space, deal flow has slowed down or stopped, he adds. “I think there will be some small deals still getting done, but in general, price transparency is not great right now and I think managers are hesitant to take on any large deals right now without a better grasp of where this is going and where we might end up over the next several months.”
Campbell’s advice for pension plan sponsors navigating the current environment is to get back to basics, such as looking at the liquidity measures within the funds in which they’re invested.
“We’ve seen some funds already close to redemptions, others close to both redemptions and purchases. And that, to a big degree, ties back to what the valuation policy is for those funds. So get your mind around what you own already, how those assets are being valued, the frequency with which they do so and how accurate you think those valuations will be.”
For plan sponsors considering making new commitments, he suggests they look at liquidity, cash flow and stress test for scenarios where capital is called a lot faster or in larger sizes than anticipated.