The Liquidity Trap

Before we go any further, I want you to sit with three questions.

• When did you last actually need liquidity from a private market investment?
• What if your liquidity preference is protecting your fear, not your portfolio?
• Have you ever lost capital to illiquidity — or to owning poor assets?

Your answers reveal more about your investment strategy than any risk model.

Because here is the uncomfortable truth that too few people in this industry say plainly: the obsession with liquidity in private markets is the single greatest destroyer of alpha I have witnessed in my career. It does not protect investors. More often than not, it costs them.

Liquidity should never be the starting point of a private market investment. It should be the by-product of owning exceptional assets.

Why the Liquidity Conversation Has Become So Loud

To understand the problem, you need to understand the world we are operating in right now.

There is approximately US$1.3 trillion locked in Growth funds that are now older than ten years. Distribution yields in private equity have fallen to 6% — less than half the long-run average of 14.8%. The median buyout holding period has stretched to four years and is rising. Thirty-five percent of PE NAV is now seven or more years old.

At the same time, the number of privately held companies has exploded. PE- and VC-backed companies now number nearly 34,000 in the US alone, compared to just 4,603 publicly listed companies. The centre of gravity in wealth creation has moved decisively into private markets — and it is staying there. Companies are choosing to remain private longer because the regulatory environment and capital availability allow it. The opportunity is genuinely enormous.

But the distribution drought of recent years has made investors nervous. And nervous investors ask for something that feels like control. So the market gave them liquidity products.

What the Market Sold You

The response from the industry has been predictable: more than half a trillion dollars now sits in evergreen and semi-liquid fund structures, with the number growing rapidly. Secondaries transaction volumes hit a record in 2025 — over US$220 billion globally. Every major manager now offers some form of 'quarterly redemption' or 'interval fund' product.

The pitch sounds compelling. Stay invested in private markets. Get the upside. But retain the option to exit.

The problem is that this pitch contains a structural lie.

When you combine illiquid assets with liquid redemption promises, you create what I call false engineering. And the consequences are always the same.

Liquidity buffers sitting in cash dilute returns — that is carry drag. Quality assets get sold at the worst possible moment to fund redemptions — that is forced asset sales. Investors get locked out precisely when they most want to exit — that is redemption gates, as seen in multiple high-profile fund blow-ups. And the strongest assets get dragged down by the structural complexity and cost of the vehicle around them — that is portfolio dilution.

Liquidity pressure appears at the worst possible moment —compounding losses rather than protecting capital.

The numbers make this concrete. Choosing a semi-liquid evergreen structure over direct private markets exposure carries what I call a hidden tax. A 1-3% liquidity buffer in cash costs $10,000-$30,000 per million dollars every year. Evergreen wrapper fee premiums of 0.3-0.8% per annum add another $21,000-$56,000 per million over a seven-year period. The average evergreen fund delivers 8-11% net returns. The average direct co-investment delivers 15-20% IRR. That gap compounds.

Conservative estimate: the total opportunity cost of demanding engineered liquidity is $180,000 or more per million dollars over seven years. You paid for liquidity you almost certainly never used.

The market charged you for the illusion of control. And in doing so, it destroyed the very capital you were trying to protect.

True Liquidity Is Earned, Not Engineered

There is a better way to think about this — but it requires you to rethink what liquidity actually means.

True liquidity is not a structure. It is not a gate or a trigger or a quarterly window. It is the natural consequence of owning assets that other people want to buy. Quality assets always have buyers. Exceptional companies attract acquirers, IPO markets, and secondary buyers regardless of what vehicle they are held in. The exit exists because the asset is good, not because the fund structure manufactured an off-ramp.

At BFA, we think about liquidity in two ways.

The first is structural liquidity — what you get from buying well. When you invest in a category-defining company at a compelling entry point, with strong governance and disciplined deal structure, you create natural exit pathways: IPOs with genuine public market appetite, M&A from strategic and financial buyers, and secondary buyers who are always present for quality assets. This is the liquidity that compounds. It does not cost you anything. It rewards conviction.

The second is portfolio liquidity — what the secondary market provides. Secondaries are not a sign of distress. They are a sophisticated tool that allows investors to rebalance portfolios without forced liquidation, accelerate exits when strategic timing demands, and manage duration with precision. The secondary market has matured significantly. Using it is not a failure of the original thesis — it is active, intelligent portfolio management.

Between these two tools — buying well and using secondaries with intent — a sophisticated investor has everything they need. The semi-liquid wrapper adds cost and risk without adding genuine control.

What Control Actually Looks Like

If engineered liquidity is not the answer, what is? In my experience, real control in private markets comes from four disciplines.

First: own exceptional assets. Quality creates its own liquidity. No engineering required. Your due diligence process, your access to the right managers, your entry discipline — these are the real risk management tools.

Second: govern with discipline. Governance and structure are not constraints. They are what protect capital when things get difficult. Avoid multi-layer deal structures. Avoid opaque arrangements. Understand exactly what you own and what rights you have.

Third: use secondaries as a precision tool. Not a fallback. Not a distress signal. A deliberate mechanism for managing duration and rebalancing on your terms, when you choose, at a price that reflects the quality of what you hold.

Fourth: diversify exit pathways. A great portfolio always has multiple potential exits. If you have one plan, you have no plan. The question to ask is not 'how liquid is this?' but 'how many ways could this generate an exit, and on what timeline?'

The combination of these four disciplines gives you something far more durable than a quarterly redemption window: it gives you a portfolio that generates liquidity because it deserves to, and the flexibility to manage that liquidity strategically.

Conviction in Practice

Let me show you what this looks like in practice. In August 2024, BFA invested in Groq — a category-defining AI inference compute platform — at a pre-money valuation of US$2.2 billion. In the months that followed, there were three separate moments at which we could have taken liquidity.

In December 2024, secondary bids emerged at approximately US$4 billion — a 1.4x return on our entry. We held. In June 2025, strategic interest valued the business at approximately US$8 billion — a 2.5x return. We held. In December 2025, NVIDIA announced a transaction valuing Groq at approximately US$17 billion.

The outcome: approximately 3.7x gross MOIC and 150% gross IRR from an 18-month hold period.

Each of those three earlier moments was a genuine opportunity to exit. Each would have produced a respectable return. But our conviction in the thesis — the structural shift from AI training to inference-dominated compute, Groq's measurable performance advantages over GPU-based inference, and the pull from sovereigns and large enterprises requiring deterministic, low-latency infrastructure — made the case for staying clear.

We did not hold because we lacked liquidity. We held because we trusted our work.

That is the difference between liquidity as a constraint and liquidity as a by-product of conviction.

The Question Worth Asking

The next time you are evaluating a private markets investment and the conversation turns to liquidity, I want you to reframe the question.

Instead of asking 'how do I get out if I need to?' — ask 'why would I want to get out of this, and under what circumstances?'

If you have done the work, built the conviction, and chosen the right managers and companies, the answer to the second question will almost always be: 'when the thesis is complete, at a price that reflects what we built.' Not in a panic. Not at a discount. Not through a gate that only opens quarterly.

Private markets reward patience and conviction. They have always been a poor place for liquidity-seeking capital. The structures the industry has built to solve that problem are, in most cases, expensive workarounds for the discipline of choosing well.

At BFA, we believe in liquidity with intent — not liquidity by design. The difference is not subtle. Over time, it compounds into everything.