Liquidity refers to how quickly and easily an investment can be converted into cash. Some investments can be accessed almost immediately. Others may take weeks, months, or longer to realise, particularly where there is no active market of buyers and sellers for the underlying investment assets.

That does not automatically make an investment good or bad. It simply means investors need to understand the trade-off.

Liquidity is not all or nothing

Most investments sit somewhere on a spectrum of liquidity.

A bank deposit is generally considered highly liquid, particularly if it is held in an on-call account. Listed securities are also relatively liquid because they can usually be sold through a public stock exchange, although the price may move depending on market conditions.

Other assets are less liquid. For example, a minority share in a commercial property, farm, or private business may be difficult to sell (convert into cash) quickly.
Private credit also sits toward the less liquid end of the spectrum. The underlying investments are loans, not assets traded daily on a public exchange. There is generally no transparent, liquid secondary market for those loan investments.

Why liquidity matters

Liquidity matters because circumstances can change.

An investor may unexpectedly need access to capital. Market conditions may shift. A business or family situation may change. If too much of an investor’s wealth is tied up in illiquid assets, it may be difficult to access cash when it is needed.

For some investors, holding part of their portfolio in less liquid assets may be appropriate, especially where they have a longer investment timeframe and enough liquid assets elsewhere. For others, a less liquid investment may not be suitable.

The question is whether the investment’s liquidity profile matches the investor’s objectives, timeframe, and wider financial position. It is an element of risk that should be priced into an investor’s return expectations – i.e. you generally expect a higher return in exchange for accepting lower liquidity.

How this applies to the Merx Private Credit Fund

The Merx Private Credit Fund invests in loans to New Zealand business and property owners, secured by mortgages over New Zealand property and/or security over business assets.

Because the Fund’s underlying assets are private loans, the Fund is not a highly liquid investment by design. It is not designed to operate like a bank deposit, and it is not suitable for investors who require immediate access to their investment capital.

The Fund’s default position on redemptions is that investors should provide six months’ advance notice if they wish to redeem their units (withdraw their investment). Investors may seek to redeem earlier subject to payment of a redemption fee.

That redemption fee is paid into the Fund, rather than to the Manager, and is intended to compensate other investors in the Fund for the impact of potential early redemptions.

Redemptions are also subject to the Fund having sufficient available cash liquidity. If a redemption request cannot be fully paid on a redemption date, it may be carried over to a subsequent date for redemption. In certain circumstances, the Manager may defer or suspend withdrawals or redemptions where doing so is necessary to preserve unitholder capital or ensure equitable treatment among investors.

How Merx manages liquidity risk

Liquidity risk cannot be removed entirely, but it can be managed.

Much of the recent global debate about private credit centres on liquidity mismatch: funds that offer frequent, near-cash redemptions while holding loans that cannot be sold quickly. In New Zealand, we saw this mismatch play out (among other issues) in the Finance Company sector in the late 2000s. When too many investors seek to exit at once, structures like these can be forced to limit withdrawals or sell assets at a discount. Merx is built differently. The Fund does not promise daily or on-demand access it cannot deliver. Its portfolio and withdrawal terms are considered in line with the assets it holds.

The Fund’s loans are generally short duration, usually committed for no more than 24 months. This helps support the ongoing recycling of capital as loans are repaid.

The Fund is also diversified across a range of borrowers and loan investments. Diversification does not eliminate risk, but it helps reduce reliance on any single borrower or loan repayment.

The Fund’s withdrawal terms are designed to manage capital movements fairly across all unitholders, so that one investor’s exit does not disadvantage the rest. Underpinning this is a disciplined approach to loan origination, monitoring, and recovery, which works to ensure capital is repaid on time.

A considered approach

Liquidity risk is a normal part of private credit investing. The important thing is that investors take time to understand it and consider its impact on their investment decision.

Before investing, investors should consider how quickly they may need access to capital, whether they have enough liquid assets elsewhere, and whether the investment fits their wider portfolio, risk tolerance and return expectations.

For some wholesale investors, accepting a lower level of liquidity may be an appropriate trade-off within a broader portfolio. For others, ready access to capital may be more important.

Investors should carefully review the Information Memorandum and seek professional advice where appropriate before making any investment decision. Investments in private credit involve risk, including the potential loss of capital, and returns are not guaranteed.

Investors must qualify as “wholesale investors” as defined in Schedule 1 of the Financial Markets Conduct Act 2013. The Fund is not suitable for retail investors.