Do Shareholder Lock-Ups Actually Reduce Volatility?

Probably not.

An analysis of credit funds of various sizes across market conditions suggests that reducing liquidity through structural lock-ups does little to create price stability.

Based on the data analysis and our experience trading private and public markets, we’ve made the following observations:

1. As expected, portfolio size, portfolio quality, shareholder base, and market conditions play the most significant roles in determining price volatility.

2. Shareholders who are inclined to sell their holdings on day one tend to become increasingly eager over time, not less.

3. Institutional investors, conversely, are more patient. They are comfortable waiting for opportunities where both the size of the trade and the pricing dislocation justify their attention.

Unsurprisingly, a larger volume of mispriced shares tends to recover faster than smaller-volume dislocations.

Consider the four BDCs that entered the traded market in Q1 2024.

Despite nearly identical lock-up schedules and similar market conditions, the graphic demonstrates significant differences in price and volume volatility among the funds.

What do you think? Do lock-ups offer improved trading dynamics, or do they merely prolong the inevitable volatility associated with non-traded listing events?

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