Liquidity

Definition

Liquidity describes how easily an investment can be converted into cash at a fair value within a reasonable timeframe. Liquidity is not only about “selling”; it also includes the predictability of cash flows, the ability to redeem, and how investments behave under market stress. Allocator Context Institutional allocators manage liquidity budgets to ensure they can meet obligations (benefit payments, spending policies, capital calls) and rebalance exposures. Illiquid allocations are typically planned across multiple years. Family offices manage liquidity around lifestyle needs, taxes, and opportunistic capital deployment. Decision Authority Liquidity constraints are often embedded in mandates and IPS documents. Increasing illiquid exposure, approving exceptions, or accepting longer lockups frequently requires committee approval. Liquidity mismatches can block allocations regardless of return potential. Why It Matters for Fundraising For illiquid funds, managers must clearly communicate lockups, redemption limitations, capital call pacing, and distribution expectations. Liquidity clarity reduces perceived risk and improves approval probability. Key Takeaways Liquidity is a core constraint Illiquidity requires planning and governance Liquidity mismatch is a common silent “no” Clear terms and pacing improve conversion