For illiquid assets, lock-up periods can last anywhere from a few months to several years, depending on the investment strategy.
There are good reasons for this, namely:
Investment protection
Alternative asset classes such as private equity, real estate, and infrastructure often generate higher returns than their publicly traded counterparts. Lock-up periods provide the asset manager with a longer investment window and time for maximizing returns. Allowing investors to freely sell or transfer their shares would disrupt the investment strategy and negatively impact returns.
Liquidity control
Investments in alternative assets typically realize the expected return on investment only after a medium to long period. Again, allowing shares to be sold at any time would negatively affect the fund’s liquidity, leading to liquidity constraints. The lock-up period serves optimal investment control.
Planning certainty
Ultimately, lock-up periods are intended to ensure that investments remain in a fund for a sufficiently long time to provide the asset manager with planning certainty. Irrational sales or spontaneous profit-taking can also destabilize illiquid assets. The lock-up period enables the asset manager to implement a strategy independent of such factors, leading to long-term success.
With the opening of the private markets to larger investor groups, challenges arise in implementing lock-up periods: Superior technical infrastructure can efficiently enforce lock-up periods even with a large number of private investors and make them STP-capable (Straight Through Processing).