Magnolia Private Wealth is proud to offer our clients access to a diverse range of investment opportunities with different degrees of illiquidity. Since we understand this concept may be unfamiliar to some investors, we've prepared this summary to explain what illiquidity means, the potential benefits of illiquid and less liquid investments, and the spectrum of illiquidity present in different investment vehicles.

At one end of the spectrum, the stocks and funds most familiar to investors are considered liquid, meaning they can be bought and sold at least daily. On the other end, private equity funds geared towards institutional investors will tie up capital for 7-10 years or more. The illiquidity premium represents an additional return investors should expect in exchange for longer-term commitments of capital, compensating them for the inconvenience and risks associated with holding less liquid assets. The ability of managers to hold such assets without the pressure of forced sales due to redemptions provides the end investor access to opportunities not otherwise available, particularly in various private markets. Investing in illiquid vehicles is a long-held practice among institutions such as pension funds, endowments, and insurance companies who invest with a long-term view and seek to capture benefits not available by investing strictly in liquid vehicles.

As we move away from liquid investments, vehicles differ in the frequency and certainty with which investors can expect their capital to be returned. Magnolia Private Wealth clients have the opportunity to invest across the spectrum, which we describe below:

Stocks and ETFs (Intraday Liquid): Individual stocks and Exchange-Traded Funds (ETFs) are highly liquid investments. They can be bought or sold throughout the trading day at prevailing market prices, offering investors the flexibility to react swiftly to market changes, seize short-term opportunities, or to raise cash.  

Mutual Funds (Daily Liquid): Mutual funds offer daily liquidity, allowing investors to buy or redeem shares at the end-of-day net asset value (NAV). 

Interval Funds (Quarterly Liquid with Mandatory 5% Liquidity): Interval funds strike a balance and are often referred to as “less liquid.”. They allow quarterly share redemptions, with a mandatory 5% of the fund available for redemption. This structure provides flexibility while ensuring the fund manager maintains control over redemptions.

Tender Funds (Quarterly Liquid with a Projected 5% Liquidity): Similar to interval funds, tender funds offer quarterly liquidity, but the availability of the 5% at the discretion of the manager rather than mandatory, allowing greater flexibility to avoid selling assets under unfavorable market conditions. 

LPs, Private Funds, and Drawdown Funds (Potentially Illiquid): Limited Partnerships (LPs), private funds, and drawdown structures are considered illiquid investments. Investors in these vehicles should anticipate a longer investment horizon, often ranging from 1 to 10 years or more. These structures are essential when the underlying investments themselves lack liquidity, such as in private equity or venture capital. 

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In conclusion, our choice of investment vehicles aligns with our clients' liquidity needs and risk tolerance. Liquidity profiles vary, and it is crucial for investors to consider the illiquidity premium and the unique opportunities associated with less liquid investments. Fund structures like interval funds and tender funds balance liquidity and illiquidity, while LPs, private funds, and drawdown structures are chosen when the underlying investments demand a longer investment horizon. These diverse options provide flexibility to investment managers, ensuring they are not forced sellers, allowing them the time required to execute on their strategies, to the benefit of end investors.