In a world where cash is either being withdrawn systemically through quantitative tightening or selectively by investor caution, capital formation is being challenged.

Public capital utilization is governed by fast cash, so when money flows out of retail funds at the pace it has, it’s a headwind to deal activity. Private capital has long-term, locked-up funds. But in this period of uncertainty, managers are also carefully weighing risk versus opportunity. Does it make sense to wait for more direction from the economy?

The answer lies in the role of the manager in an illiquid asset class. For private equity and credit, portfolio construction is key. As we’ve seen in a prior series [link], the importance of picking the right assets from the start largely determines returns. Since you can’t trade the assets, you can’t unload a problem into a ready secondary market.