November 19, 2025 | Quiet Counsel | 6 min read

Privates Exposed: When Lack of Liquidity Catches Up with Investors

In recent months, several Canadian investment managers have delivered tough news to clients: withdrawals were being restricted in private asset strategies due to “gating” of redemptions. In this edition of Quiet Counsel, we explore what’s driving this environment for private asset investing and how we approach these investments in our own clients’ balanced portfolios.
 

What is Gating?

Managers of private asset funds – which hold assets that do not trade on liquid markets, such as real estate, infrastructure, hedge funds, private credit – can “gate” redemptions when too many clients want their money out at the same time. For many funds, this level is about 2.5% of fund assets. The practice makes sense because as the manager, you don’t want to be forced into a fire sale of an office building, for example, to satisfy exiting unitholders. To prevent this, managers can invoke a clause which allows them to limit or suspend client redemptions for unspecified periods of time – sometimes years.
 

Drowning in Illiquidity

The average institutional investor has a good view of their cash needs and a long time horizon, so can often handle “illiquidity” risk better than an individual investor. If you’re an individual with an unexpected need for cash and/or a large exposure to private assets, it can be a problem. In such a case, their advisor may struggle to raise cash to fund their needs, maintain an asset mix that’s appropriate to their appetite for risk, or both.

We wrote about this problem in a May 2024 OpEd for The Globe and Mail (Understanding the Illiquidity Trap) (emphasis added):

Investment in real estate, infrastructure, venture capital, private equity and credit has worked well for investors with long time horizons and limited liquidity needs for many years. But my colleagues and I are seeing a worrying industry trend: individual investors carrying alarming levels of private assets in their portfolios – 50 per cent or more in some cases – potentially without understanding the true nature of the illiquidity risk they’ve assumed. 

Unfortunately, the potential “gated” future imagined in that piece appears to be materializing for some Canadian investors: concern about performance is prompting them to request their money, and the spike in redemption requests is forcing managers to gate their funds.

Whether that gating triggers a cascading, “run on the bank” reaction from remaining clients is yet to be seen. Ultimately, market conditions and each manager’s approach will determine both the timing and the price clients will receive for their fund units.
 

A Balancing Act

In a recent court case, the former president of a Quebec-based asset manager sued for wrongful dismissal, partly over a disagreement about how to handle the infrastructure fund’s redemption queue, which represented nearly 15% of the fund. She claimed the firm wanted her to sell assets to raise the cash, “even if it had to be done at fire sale prices,” something she wanted to avoid.

This conflict illustrates the delicate balance that private asset management firms must strike: satisfy client liquidity needs, maximize asset returns, and crucially, maintain trust in the overall enterprise.

To shore up confidence, the leadership of affected firms have issued press releases and given interviews that counsel calm and point to the underlying health of the funds. As an investor, how can you tell how healthy the fund is?
 

Defying Gravity

One way to assess private asset funds is to look at the reasonableness of the reported returns. For example, one Canadian manager reported returns in four real estate funds that exceeded their public market equivalents (real estate investment trusts, or REITs) by ~35-50% in the very challenging year of 2022. In 2025, they wrote down the value of two of the funds – one by nearly 20% – but the other three have seen more muted impairments.

High interest rates and a fear of recession clobbered the prices of public REITs in 2022. While their slow reporting cycle can create a lag in private valuation corrections, in theory, private and public real estate valuations should realign once interest rates, market conditions, and the broader economic outlook stabilize for a few quarters.

Unfortunately, this has not happened. Interest rates are settling into a new normal that is 1-2% higher than the past 15 years, and real estate developers are struggling with high costs, hesitant buyers, oversupply in some segments, and a muddled, tariff-marred economic outlook. Developments are being delayed and bankruptcies have claimed a few developers already.

Given that, one would expect private funds to eventually reflect valuations consistent with today’s challenging real estate environment and outlook. Portfolio theory also suggests that, all else being equal (similar performing assets on average), private real estate funds should trade at a discount (not a premium) to public ones, to compensate investors for illiquidity. Clients should ask their advisors where their funds stand in their valuation cycle. Have they “taken their lumps” from the 2022/2023 correction yet?

Open-ended private asset funds (i.e., ones that allow client money to flow in and out) satisfy client redemption requests either by selling assets, or by raising cash from new investors into the fund. This is another reason why that balancing act is so important: if investor confidence is rattled, existing clients can race for the exits at the same time that outside cash dries up. There is a strong disincentive to invest in a fund, after all, that is using your cash not to invest in great projects, but to fund people on the way out. 

The Leith Wheeler Approach to Private Asset Investing

The valuation concerns mentioned above were what prompted Leith Wheeler to pause in committing client capital to private real estate in the new Leith Wheeler Private Asset Fund (PAF). The PAF launched in June 2022 and while we’d identified our private real estate sub-advisor, we didn’t allocate any capital to them until December 2024. We first wanted to see valuations in the real estate sector reflect the new reality.

Here are a few additional factors we considered when selecting the real estate sub-advisor for PAF:

• We wanted to see that a majority of the other investors in the real estate strategy were institutional, which as discussed tend to have more patience with private illiquidity and are typically more focused on their long-term asset mix strategies.
• We looked at managers’ experience through the Great Financial Crisis (2008/2009), COVID (2020), and the 2022 rate hike. If they restricted redemptions, was there a timely and orderly return to normal?
• We needed to see that they had multiple layers of third-party oversight of valuations of their properties, to ensure an objective valuation of the fund.
• We looked at their holdings to ensure they were diversified by region and property type.
• In the 2022-2024 timeframe, higher interest rates impaired the potential profitability of deals. Managers who made acquisitions with weak economics could therefore be vulnerable to long-term impairment of their portfolios and/or cuts to their distributions – so we excluded managers who were making acquisitions through this period.
• We preferred to see fund assets financed with fixed interest rates, which locks in the acquisition metrics and avoids exposure to rising rates.

The PAF also invests beyond private real estate, diversifying into global infrastructure and private debt through high-quality institutional managers with the expertise and scale to navigate various economic cycles. Based on our research, we believe these alternative asset classes offer an attractive risk-return profile that appropriately compensates investors for illiquidity risk.
 

How Much is Enough?

In our view, investors without a lot of excess wealth cannot take on illiquidity risk and should therefore own 0% in private assets. Those with capital with a time horizon longer than 15-20 years might allocate a modest portion (perhaps 10-20%), while ultra-high-net-worth individuals and institutional investors can take on more illiquidity risk – even up to 50% – because their portfolios are large enough to support their spending needs from the remaining liquid portion.

Put simply: if you rely on selling your investments to fund your lifestyle, you should consider illiquidity risk carefully.
 

Private Assets Aren't a Bad Idea - in Moderation

Investors are drawn to private assets for their potential to enhance diversification, returns, and income. However, these benefits come with trade-offs: greater complexity, additional risks, and as discussed above, reduced liquidity. The key is moderation: understand the risks in your portfolio, take only those you can afford, and ensure you’re being properly compensated for taking them.