How Bay Street Calibrates Liquidity Risk to Create Real Alpha

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Why Illiquidity Needs to Be Quantified Precisely

In hospitality, illiquidity varies by geography, asset type, deal structure, and macro regime.

• Flat premium assumptions regardless of region or asset type.

• No differentiation based on currency, repatriation, or asset liquidity.

• Lack of integration into volatility-adjusted scoring or exit modeling.

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Bay Street’s Illiquidity Premium Model

Formula:

IP = (IRR_private − Yield_public REIT) − Δ_risk

Where:

• Yield_public REIT = yield from similar type/location REITs

• Δ_risk = Volatility-adjusted synthetic spread × Dispersion Multiplier

Dispersion Factors include:

• Exit Certainty Score (projected liquidity at exit window)

• Local M&A Sale Volume (hotel sales 3-year average)

• FX Volatility Index (rolling 90-day standard deviation)

• Repatriation Risk (capital control exposure)

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Application to Bay Score & AHA

The calculated IP modifies IRR forecasts (lowering AHA if drag is high), penalizes BAS through increased synthetic volatility, and adjusts Bay Score via dispersion factors if mitigants are lacking.

Example Calculation:

• Private IRR: 16.2%

• Comparable REIT Yield: 10.3%

• Dispersion Multiplier: 1.4

• Volatility Spread: 6.0%

• IP: ≈2.2%

• Adjusted AHA: 3.7%

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Regional Benchmarks: How IP Varies

• U.S. Tier 1: 1.0% – 2.5% (high liquidity)

• India Tier 2: 3.5% – 6.5% (FX, local opacity)

• Portugal: 2.5% – 4.0% (moderate liquidity friction)

• Indonesia: 5.0%+ (high capital control risk)

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Strategic Implications

• Target mispriced illiquidity premiums where downside is mitigated.

• Use public REIT beta compression as private entry timing signal.

• Avoid stacking high-drag deals degrading overall BAS.

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LP Questions to Ask

• How is the illiquidity premium modeled for this deal?

• Does the synthetic volatility adjustment align with historical norms?

• Are FX and capital repatriation risks fully integrated into IRR projections?

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Conclusion

Illiquidity is not a checkbox. When properly quantified, it becomes an alpha signal—allowing investors to enter at wide spreads, control downside, and optimize for risk-adjusted outcomes. Bay Street’s quantamental model transforms static discounts into actionable intelligence, reinforcing disciplined hospitality investing at an institutional level.

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