How Should a Family Assess the Tradeoff Between Liquidity and Potential Return?

Assess liquidity by asking whether the family can hold an investment through its expected term without disrupting spending, commitments, or portfolio plans. A higher potential return may not help if the family must sell at an unfavorable time to meet cash needs. Review exit terms alongside the family's likely cash demands.

Map Cash Needs to Time Horizons

List expected spending, taxes, capital calls, and other commitments, then identify when funds may be needed. Separate near term cash needs from capital that can remain invested longer. Family circumstances can change, including spending plans and responsibilities, so leave room for uncertainty. The capital call and liquidity planner can help organize expected outflows against available liquidity.

Classify each investment by how and when you can access the capital. Publicly traded holdings may be sold more readily, while a fund may require notice before redemption or impose a set redemption cycle. Private investments can take much longer to return capital, and an early sale may be unavailable or costly. A stated redemption window does not guarantee that the underlying assets can be sold without friction.

Price the Limits on Access

Liquidity can be valuable even with a lower expected return. It gives the family options if spending needs change or another commitment arises. Compare that flexibility with the possible return and fees for a less liquid investment, and estimate the chance of loss. Ask how the investment performs under a difficult exit scenario and in the expected case.

Look closely at the structure. A fund may offer periodic redemptions while holding assets that take much longer to sell. That mismatch can create gates, delays, or other limits when many investors seek cash. Review the manager's liquidity terms alongside the liquidity of the underlying holdings. For an account or fund with special exit rules, consider how those limits fit the family's overall liquidity plan across investment horizons.

Set an Allocation the Family Can Sustain

Decide how much capital can be committed for the full holding period and preserve enough accessible resources for foreseeable needs. The right balance depends on the family's objectives and time horizon, as well as its ability to tolerate delayed access. Review the plan when spending needs or commitments change, and include all relevant accounts and entities.

When comparing a private investment with a publicly traded alternative, assess the same underlying exposure where possible, then account for differences in fees and control. Also consider liquidity and the demands of operating the investment. The private and public investment comparison can help organize those questions. Document the assumptions and decision process in the family's investment policy statement.

The family should be able to hold an illiquid investment through a difficult period without relying on a quick sale. If that is unrealistic, the possible return may not compensate for the loss of flexibility.

Family offices typically are more secretive than other investors, they work off of referrals a lot of the time, they are more long-term oriented than high net worth individuals and fund of funds, they need more liquidity than some very large institutions, and they do not want their time wasted but at the same time they like to take their time with big decisions.

Sources: The Family Office Book. Informational only, not financial, legal or tax advice.