Private markets are inherently less liquid than public markets, and locking up funds for a significant period is unfamiliar to many private investors.
Additionally, regulators around the world are concerned about the potential risks associated with private assets during market stress. A key focus of regulators is on the liquidity mismatches that can arise if open-ended funds invest in illiquid investments and allow too much flexibility on redemptions.
But private asset managers are exploring ways to address this liquidity challenge, including evolving from fixed-term funds to more flexible indefinite-term funds, and introducing open-ended semi-liquid funds as well as offering new regulated structures.
Semi-liquid, or ‘evergreen' funds
Semi-liquid funds, as the name suggests, offer a balance between liquidity and the potential for attractive returns by investing in a mix of liquid and illiquid assets.
While these funds do not require capital to be locked up, like closed-ended vehicles with fixed terms, redemption windows might still be infrequent and subject to limitations and are therefore most appropriate for investors with a longer-term time horizon. The options in the semi-liquid fund space are increasing with more providers coming to market with new vehicles offering a diverse range of strategies.
Within semi-liquid structures, investors can buy and sell at a prevailing Net Asset Value (NAV) as they are transacting with the manager of the fund (rather than other investors in a secondary market). This allows investors to deploy their capital immediately into a diversified private markets portfolio at the NAV of the fund at a given time, rather than waiting for their cash commitments to be drawn down over time.
Investing at a fund's NAV reduces volatility or public market beta compared to daily traded listed closed-ended funds. This type of closed-ended fund relies on a secondary market for liquidity where the price investors receive is based on the prevailing market supply and demand dynamics.
However, this also means that liquidity in a semi-liquid fund is not as high as it is for listed closed-ended options. Semi-liquid funds typically deal less frequently (often monthly or quarterly), with prescribed notice periods and can "gate" when certain thresholds are breached, potentially limiting the amount which can be redeemed at a given dealing date.
In semi-liquid funds, a well-constructed portfolio, diversified by geography, sector, and asset type (and with a potential small allocation to liquid investments), can engineer a level of "natural liquidity" that is regular and consistent. Semi-liquid funds also employ liquidity management tools that can control liquidity within the fund, such as setting redemption limits and realising liquid investments (see below).
A clear assessment of a fund's mechanics to provide liquidity is crucial to any wealth manager allocating client's capital to this fund structure.
Long-Term Assets Fund (LTAF)
The LTAF is a UK authorised open-ended fund that invests in long-term illiquid assets while offering flexibility for investors to buy and sell.
To ensure investor protection, robust rules govern the LTAF. These rules outline possible liquidity mechanisms that can be used by the fund manager and limit the frequency of redemptions offered. They also establish a consistent relationship between the liquidity of the fund's assets and its redemption terms. This alignment ensures that investors are aware of the notice period required to redeem their investments and the liquidity of the underlying portfolio. Some liquidity rules for the LTAFs are pre-determined, which include restrictions on dealing frequency (no more than monthly) and a mandatory notice period of at least 90 days for redemptions.
Optionally, some LTAFs may have longer notice periods and less frequent dealing, depending on the fund manager's discretion. These terms must align with the fund's underlying liquidity profile.
Like other semi-liquid funds, an LTAF portfolio can generate natural liquidity through the yield or distributions from its underlying investments. These returns should closely match the expected level of investor redemptions in a stable market.
Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.
For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.
Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.
