Create liquidity from illiquid assets

Jeffrey Gery
Senior Custom Credit Banker
Wells Fargo Bank, N.A.

When was the last time you reviewed your illiquid asset portfolio with your advisor and discussed the impact those assets may have on your short- and long-term financial goals?

Illiquid assets are those you own where the ability to sell them is limited or restricted compared to liquid assets that can be easily converted to cash. Examples you may be familiar with include a business, limited partner interests in private equity or hedge funds, or restricted or concentrated stock. Others may be a surprise, such as real estate investment trust (REIT) Operating Units, private stock, or fine art. This is not an exhaustive list of illiquid asset types. Your advisor can help you identify others that may not be listed here.

The reasons these assets are illiquid are varied, but in many instances tax consequences, investment restrictions, and at times a personal or emotional connection are contributing factors. But you may not realize you can potentially have the best of both worlds: you may be able to access a portion of the capital tied up in an illiquid asset while still enjoying the benefits of ownership.

Illiquid assets carry the same risks as any other investment, and those risks are important for you to consider as you develop your financial goals.

As you work with your advisor to develop a plan for your illiquid asset portfolio, you should consider that a portion of the capital tied up in these assets can potentially be unlocked to provide the liquidity needed to facilitate your strategic financial goals.

Working in partnership with a Wealth Custom Lending Specialist, your advisor can introduce you to the possibility of a multi-year line of credit based on the fair market value of some of the illiquid assets in your portfolio. Not every asset will qualify, but there are custom loans available secured by limited partner interests in private equity, private, restricted, or concentrated stock investments, and at times fine art. Please note the value of your investments can change over time, and if the value declines, you may be required to pledge additional collateral or pay down the loan.

Consider the flexibility a line of credit secured by an illiquid asset may provide as you develop your goals and include the following topics in your discussions with your advisor. 

Cash-flow planning and access to liquidity

As you talk to your advisor about the tax implications of selling investments versus borrowing against them to meet short-term liquidity or cash-flow requirements, consider expanding that conversation to include your illiquid assets. 

Concentrated risk and asset diversification

Ask about how a line of credit can potentially be used to purchase other types of investments (marketable securities, commercial real estate, etc.) to diversify your investment portfolio. 

Estate, tax, and succession planning strategies

Any significant illiquid asset you own should be part of your estate, tax, and succession planning strategies. There are many strategies to consider, and your planning advisors can help you develop a strategy for your specific situation. 

Gifting and philanthropy

Finally, consider whether you want to gift any of your illiquid assets, while you’re still alive. Talk to your advisors about any tax benefits that may accrue as a result. Additionally, think of what you want your legacy to be.

Whether you are seeking to generate cash flow, diversify your wealth, or thinking about estate planning and your philanthropic goals, your illiquid assets may play a greater role in helping you to achieve your financial goals than you may have realized.  Contact your advisor to learn more about unlocking the potential of your illiquid assets.