Growth in secondary trading in private assets may undermine investors’ ability to earn an illiquidity premium, according to a Pimco analyst.
Lotfi Karoui, multi-asset credit strategist at Pimco, said that enhanced tradability is viewed by some as “a remedy to growing unease over the absence of transparent, real‑time valuation signals in private portfolios”, while others see secondary trading as a way to mitigate “jump risk” in direct lending credit portfolios, which is “where loans are commonly carried at par until fundamentals deteriorate and repricing becomes unavoidable”.
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In his latest investment note, Karoui observed that public credit market liquidity is as strong as at any point since the Global Financial Crisis, while in recent years, spreads between less liquid direct lending and more liquid public credit have compressed materially.
As a result, investors are often not being adequately compensated for the illiquidity they are assuming in private markets, particularly in corporate credit.
“The promise of greater secondary liquidity in private assets is, in some cases, being used to justify a meaningful erosion of the illiquidity premium in direct lending relative to public markets, rather than to genuinely improve investor outcomes,” he noted.
He warned that attempts to force liquidity into these markets tend to produce “thin trading, wide bid‑ask spreads, and unreliable price signals” and that, instead of improving transparency, sporadic secondary trades “often introduce noise, reflecting liquidity needs rather than underlying fundamentals”.
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Karoui identified what he called “a deeper economic tension”, which is that the main appeal of private assets is the illiquidity premium earned by long‑horizon investors willing to lock up capital.
“If private assets were to trade frequently and reliably in secondary markets, that premium would inevitably erode – undermining one of the primary reasons investors allocate to private assets in the first place,” he wrote.
Rather than viewing the absence of continuous, mark‑to‑market pricing in private assets as a “structural flaw”, Karoui said it should be seen as a distinct risk profile, “one for which investors must be explicitly and adequately compensated”.
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