Managing through Today’s Environment for Illiquid Assets: 3 Questions With Eric Friedman

Managing through Today’s Environment for Illiquid Assets: 3 Questions With Eric Friedman
December 23, 2025 8 mins

Managing through Today’s Environment for Illiquid Assets: 3 Questions With Eric Friedman

Institutional Investors: Navigating Illiquid Asset Risks and Challenges

Aon provides insights for institutional investors on illiquid assets, highlighting trends, challenges, and innovative solutions to manage portfolio liquidity.

01
What are institutional investors experiencing today with respect to their illiquid assets?  

For the past several years, distributions from illiquid assets have slowed. This has occurred across many asset classes including private equity, private real estate, and infrastructure. In addition to a slowdown in distributions from closed-end funds, some open-end funds have also erected gates, effectively preventing a number of their investors from getting the liquidity anticipated. Throughout this period, fundraising continued as did capital calls. There are now institutional investors where illiquid assets are above their policy asset allocations, putting stress on those trying to manage their portfolios. 

Many investors are trying to understand to what extent this is a short-term phenomenon versus a new normal that they should expect from illiquid assets. Quite a few are adjusting their commitments and, in some cases, considering secondary sales. 

At the same time, asset managers are trying to create new solutions for liquidity. For example, “continuation funds” are being offered, which  manufacture the opportunity for distributions, even if not with a true exit from the illiquid positions. In addition, some asset managers are trying to create more open-end interval funds, which allow investors greater opportunity for liquidity, though there is still the potential for lock-ups. 

How institutional investors think about today’s environment and product innovation will affect how much they commit to new vintages of illiquid assets, as well as how they will allocate capital to different types of products. The perception and risk of illiquidity is bumping up against the need for diversification. How investors solve for this will impact their allocations to illiquid assets in the coming years, and of course, ripple through to their risk and return results. 

02
How should institutional investors assess portfolio risk when illiquid assets exceed their target allocations?  

An approach to assess illiquidity risk is to categorize it as follows:

 Level  Commentary
 1 Allocations to individual illiquid asset classes (e.g., private equity vs real estate) being above their target allocations. In this case, the illiquid assets may crowd out a portion of the liquid return-seeking assets such as public equity. As an example, an investor may have a target allocation to private equity of 10%, but the actual exposure is 15%, while the public equity allocation has fallen by a similar amount. We view this type of situation as relatively normal and not typically a problem, as it doesn’t significantly change the portfolio’s risk exposures or impede the ability to make distributions. If the allocation is outside the policy range, that may warrant more concern, but is not necessarily alarming (depending on the specifics of the situation). Investors may want to pare back commitments incrementally. 
 2 Allocations to the aggregate of all illiquid assets are so large as to force the total return-seeking (also known as “growth”) assets to exceed the target. For example, if the investor has a target allocation to all return-seeking assets of 70%, but the total allocation to illiquid return-seeking assets unintentionally gets to 75% (because of factors like elevated capital calls, reduced distributions, and/or outflows from the liquid assets). We view this as a significant problem from a risk-management perspective, as the portfolio’s risk exposures are significantly different from what is intended. The portfolio should still be able to make distributions as needed, but this level is a warning sign that the investor is getting closer to having problems making distributions—the third (and most problematic) level of concern. Investors may want to pare back commitments significantly and consider secondary sales. 
 3 Allocations to illiquid assets compose the whole portfolio—creating a solvency problem if the investor needs to withdraw cash.  This is extreme and should be rare. It is the most serious of liquidity problems, when the portfolio fails to support its underlying purpose. Actions should be taken before the portfolio gets to this position to make this situation very unlikely, and significant effort and costs should be undertaken to avoid it. 

Today, many of our clients are in the first level, but not near the second or third. 

03
What should institutional investors do to manage their exposures to illiquid assets?

Seven steps we suggest for many of our clients: 

  1. Determine where portfolios are relative to the asset class policy targets. 
  2. Stress-test the portfolio under different economic scenarios to assess how allocations may change in the future. We often do such stress-tests when developing policy target allocations as part of asset/liability studies (for pensions) and asset allocation/spending studies (for non-profit asset pools), but such studies could be done at other times if there is concern. These studies will help you understand the likelihood of future problems, which can affect the desired course of action now.
  3. Adjust the portfolio allocations and commitments as needed. This could include a pacing analysis, thoughtfully balancing goals to gradually move closer to the policy targets with a preference to maintain vintage year diversification. If there is the ability to reduce positions in open-end illiquid assets to get closer to the targets, that also may be worth considering. To the extent that the actual allocation isn’t identical to the target, one approach may be to offset overweight positions in illiquid assets with corresponding liquid assets (e.g., an overweight position in private equity can be offset with an underweight position in public equity). Our market outlook currently favors certain alternative assets, so a modest overweight to them may be desirable. In most cases, portfolio adjustments with secondary sales should only be done as a last resort. 
  4. Pursue opportunities when it is advantageous. When some investors are paring back their illiquid assets, this may create opportunities for other investors. For example, investing in secondary strategies may be beneficial if others are selling at distressed pricing. 
  5. Evaluate other sources of liquidity, such as credit lines, which may only be worth the cost if the investor makes heavy use of illiquid assets.
  6. Consider implications for future commitments and vehicles. Assess the preferred levels of future commitments to illiquid assets, as well as the preferred mix of open and closed-end fund structures. 
  7. Importantly, reflect on the goals and objectives of the asset pool.  What are the cash flow needs? Is it expected that cash inflows/outflows may change in the future? Know the time horizon and estimate the certainty of the expected cashflows.
Aon’s Thought Leader
  • Eric Friedman, CFA, FSA, EA
    Investment Analytics and Strategy Development, Aon Investments USA Inc.

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