A high-profile equity investment fund in the UK ran into trouble after encountering a liquidity constraint. The fund, Woodford Patient Capital Trust, manages significant institutional capital with a fund size of 3.7 billion pounds.
Ultimately, the fund ran into trouble because it invested in too many privately held assets that couldn’t provide enough liquidity for investors.
Woodford Equity exemplifies a growing challenge for capital markets. Investors are seeking more opportunities in the privately held space. However, liquidity in this space is hard to establish. Traditionally, liquidity comes in the form of an IPO for high-growth startups or additional fundraising for buyout firms or assets.
This requirement puts pressure on fund managers to obtain out-sized returns that offset either risk or a lack of liquidity.
Efficiency in Secondary Markets
Regulatory authorities are only beginning to authorize secondary markets for privately held companies and assets. The current need is potentially greater than the pace at which the roll-out of secondary markets is occurring.
As the infrastructure grows, largely through Blockchain enabled secondary markets, firms must establish how privately held shares are valued and sold.
In addition to infrastructure, many note the challenge of infinite liquidity and trading for privately held companies without the same market capitalization volume as their publicly-traded counterparts.
The Cost of Liquidity
For an owner of a small to mid-size business, liquidity is a premium opportunity. The firm may be interested in providing liquidy to employees with stock options or they may be interested in obtaining equity capital to leverage their ability to purchase tangible assets.
Would a firm be willing to accept slightly less than fair value to access liquidity? The answer could be yes in many cases.
The discount could attract funders interested in investing in secondary markets, while still providing an accelerate for smaller firms.