Managing cash flows and liquidity in private market portfolios

Quick read:

• Private markets may potentially improve portfolio outcomes by offering amplified differentiated return opportunities, however they also introduce new trade-offs and risk considerations around liquidity and cash flows.
• Diversifying liquid alternatives with proven ability to generate consistent returns over cash with low correlation to private markets can play a role in addressing this challenge and improving average client outcomes.

Private markets refer to investments made in asset classes that are not traded publicly on an exchange. These asset classes, such as private equity, private credit, real estate and infrastructure, are playing an increased role in financing the economy – and they are playing increased roles in investment portfolios as well. Of the 1,000+ financial advisors who attended BlackRock’s In the Know in January 2025, ~26% indicated following the webcast they are considering adding to private markets in the next 12 months.

Private markets may potentially improve portfolio outcomes by offering amplified differentiated return opportunities, however they also introduce new trade-offs and risk considerations around liquidity and cash flows.

Given a portfolio of private investments, investors may consider to manage cash that’s earmarked for future commitments or returned from potential public investment distributions to try to meet dual objectives: (1) generating additional capital appreciation and (2) minimizing the risk of not meeting capital calls or other cash flow needs.

Investors that are primarily focused on the first objective may lean towards investing uncalled capital in public market proxies. For example, high yield bonds or public market equities may be statically held in a liquid portfolio that is intended to fund a private credit allocation. Other examples may include static exposures to listed real estate or infrastructure funds, listed private equity ETFs, and bank loans. These exposures seek to mimic private market equivalents and potentially generate capital appreciation. However, the potential market upside also comes with a risk that public market underperformance may collide with a need to provide capital to fund private market commitments, leading to a cash shortfall. This is exacerbated in instances where there is high correlation between public market drawdowns and potential for private market capital calls, as capital is more likely to be called in periods of funding stress and when potential valuations are more attractive. In such environments, investors may be forced to sell public market exposures following market drawdowns; even worse, investors may be unable to meet capital calls, facing harsh penalties.

Of course, investors can potentially mitigate these risks by maintaining the uncalled liquid portfolio in cash. The obvious drawback of this approach, however, is the opportunity cost, which effectively dilutes the potential for private investment returns.

Private market alternatives, meet diversifying liquid alternatives

There are alternate approaches that may help investors balance the pros and cons of the two approaches. This could include diversifying liquid alternatives, particularly those with track records of generating consistent returns over cash with low correlation to private markets.

We have found that a portfolio of diversifying liquid alternative strategies has historically achieved more consistent and often higher asset values at the end of a 10-year horizon compared to simply holding cash or a static portfolio. Importantly, the likelihood of cash exhaustion has remained very low.

Conclusion

In an economic landscape characterized by shifting interest rate environments, growth uncertainty, and increased volatility, more and more investors may look to alternatives . Private market alternatives and liquid alternatives have distinct characteristics and play distinct roles in portfolios. For example, risk and return expectations, liquidity, and fees can vary. Yet, as we’ve outlined in this piece, investors may also consider that these assets can also sit together as complements.

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