For years, investors have been happy to lock their money away in private investments.
When interest rates were low, as they were after the pandemic, investors and super funds were attracted by the promise of higher returns and smoother valuations outside public markets.
Being unable to sell your investment for five or 10 years was presented as a feature rather than a problem.
Now the cycle is turning.
Investors are discovering there’s a big difference between what an investment is worth on paper and what they can actually get back in cash. Many are finding that getting it back is much harder than putting it in.
Private credit’s risk problem
Private credit was one of the biggest beneficiaries of the hunt for yield.
Investors were attracted by returns well above bank deposits, often reassured that loans were secured against property.
But lending against property doesn’t make an investment risk-free. And a loan that takes years to repay can’t necessarily be converted into cash just because investors want their money back.
The collapse of Sydney property developer Bathla has brought this problem into focus.
Bathla entered administration in August owing around $3.4bn to more than 40 lenders. Its collapse exposed private credit funds that had financed its developments. Some funds subsequently restricted withdrawals as investors sought to retrieve their money.
ASIC is now sounding the alarm.
In a speech this month, ASIC Commissioner Simone Constant revisited the regulator’s 2025 review of 28 private credit funds. Of the 14 wholesale funds examined, only two conducted liquidity stress testing. She said ASIC was beyond warnings and that the sector should prepare for enforcement action.
Redemption restrictions can protect remaining investors. But they also expose a fundamental mismatch. A fund promising regular withdrawals while holding loans that can’t easily be sold is making a promise that might become impossible to keep.
It’s easy to offer liquidity when nobody wants it. The real test comes when everyone wants it at the same time.
Private equity’s exit problem
Private equity faces a different version of the same problem.
The traditional model is straightforward. Buy a business, improve it, then sell it a few years later for a profit.
During the era of cheap money, private equity firms could borrow heavily to fund acquisitions. Rising valuations made it easier to sell businesses at attractive prices.
Higher interest rates have complicated both sides of that equation.
Borrowing is more expensive and buyers are less willing to pay the valuations sellers expect. Businesses acquired at peak prices are proving particularly difficult to exit.
The result is a growing backlog of investments waiting to be sold.
According to Bain & Company, private equity firms are holding investments for around seven years on average, compared with the traditional three to five years. The backlog of unsold companies has reached roughly 32,000 worth $US3.8 trillion ($5.4 trillion).
Unlike listed shares, private equity stakes can also come with restrictions on who can buy them. Other investors may need to approve a sale or have the first right to purchase.
And when buyers know a seller desperately needs cash, they’re unlikely to offer top dollar.
Some private equity firms have responded by selling investments to new funds they also manage, known as continuation funds.
These transactions can provide liquidity. But moving an investment from one fund to another isn’t quite the same as selling it to an independent buyer.
Venture capital’s 10-year wait
Venture capital has an even longer liquidity problem.
Investors typically commit money to funds with a 10-year life. The expectation is that successful start-ups will eventually list on the sharemarket or be acquired, allowing the fund to return capital and profits.
But start-ups are staying private for longer.
Local venture capital firm AirTree provides an interesting example.
AirTree invested in Canva in 2015 and began selling portions of its stake in 2021 to return money to investors. By April 2024, its first fund had returned more than its original invested capital while still retaining most of its original Canva holding.
AirTree’s investment in Canva has been hugely successful. But even one of Australia’s biggest start-up success stories has required carefully arranged secondary sales to turn paper gains into cash.
For investors in less successful venture capital funds, the wait can be much longer.
In the United States, venture capital investors contributed $US46.2bn more to funds than they received in distributions during the first nine months of 2025, according to figures reported by The Wall Street Journal.
Investors who committed money a decade ago might still be waiting for meaningful distributions.
Their fund could report an attractive valuation. But they can’t spend that valuation, reinvest it elsewhere or use it to meet an unexpected financial obligation.
The value of being able to sell
Investors have traditionally expected an illiquidity premium to hold private assets. That is, they expect higher returns in exchange for locking their money away.
But what if some have been accepting an illiquidity discount instead and are paying higher fees and sacrificing access to their money in exchange for the comfort of not seeing daily price movements.
Those same people are now realising a smooth-return isn’t necessarily a safer one.
A listed investment might fall 10 per cent tomorrow. An unlisted investment might report exactly the same valuation for another three months. That doesn’t mean the unlisted investment hasn’t lost value. It might simply mean nobody has tried to sell it.
A diversified portfolio of listed shares or ETFs can generally be sold during market hours. You might not like the price, particularly during a downturn, but at least you know what someone is willing to pay.
None of this means private markets are inherently bad investments, but perhaps investors are finally waking up to the risks of illiquidity.
Like everything in financial markets, investment fashions move in cycles.
Liquidity is one of those investment features nobody thinks much about until they need it. And it looks like it’s making a comeback.
This article was originally published as an opinion piece for The Australian – Private markets reality check puts investment liquidity back in focus (1 October 2026).
