I am looking at a portfolio of private assets which is a mix of real estate, infrastructure and private equity. These consist of a handful of direct investments in real assets (not a fund of funds) and so are highly illiquid.

My goal is to get a metric indicating whether the liquidity risk of the private asset portfolio as a whole is deterioriating or improving. What are some approaches or models that would provide insight into the liquidity risk for private assets?

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    $\begingroup$ Difficult question! Quoting Pastor and Stambaugh (2002), "Liquidity is a broad and elusive concept that generally denotes the ability to trade large quantities quickly, at low cost, and without moving the price." Liquidity risk is even more elusive, denoting either (1) the risk an asset itself becomes illiquid or (2), the covariance of an asset's returns to unexpected changes in aggregate market liquidity (i.e. exposure to a systematic liquidity risk factor). Are you trying to measure their current liquidity? Probability of becoming illiquid? Covariance with aggregate liquidity?Something else? $\endgroup$ – Matthew Gunn Nov 9 '17 at 15:35
  • $\begingroup$ The market liquidity risk that I'm referring to here is really current exit risk - i.e the risk (as of now) of being forced to sell at a discount or be locked up longer than desired, etc. What i'm interested in is seeing (1) an aggregate measure of this for a portfolio consisting of multiple illiquid private assets and (2) how this is evolving over time (i.e is liquidity deteriorating or improving) $\endgroup$ – beeba Nov 9 '17 at 16:10

Excellent work on this has been done by Abbott in the Valuation Handbook.

See: Abbott, A. (2009) Valuation Handbook: Measures of Discount for Lack of Marketability and Liquidity. Wiley Finance, Hoboken, 474-507.

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  • $\begingroup$ @beeba: Please share a summary of findings? $\endgroup$ – rrg May 24 '18 at 23:25

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