An institutional investor has 45% of their assets in private investments – private equity and private...

An institutional investor has 45% of their assets in private investments – private equity and private debt. These investments do not trade daily and do not have daily pricing. (Buying and selling these investments is somewhat difficult.) This allocation has allowed them to achieve top performance over the past decade.

How is this a challenge to managing their rebalance policy if there is a substantial recession? How could this help or hurt them?

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Expert Solution

Private investments which are in form of private equity and private debt are highly illiquid Assets and at the times of recession, realisation of the Assets Would not be easy for the investor.

this private investments which are in the form of private debt, would be highly exposed to the solvency risk because this private organisations are highly exposed to the repayment risk because these companies do not have adequate cash on their books because they believe in growth so the cash crunch and the credit crunch can really hurt them bad.

these private equity investments are also excessively valued at the time of the Bull run, but when the market starts to correct, there are no buyers for them so investor needs to be highly cautious in offloading them as quick as possible in case of recession.

so these private investments are highly risk investments and they need to be quickly realised or they need to be invested for very long term in order to make high returns, if the investor believes that these private companies are going to survive the recession.

jeff jeffy answered 1 year ago

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