For many years, large institutional investors have enjoyed the benefits of investing in illiquid assets while private investors have been left behind, unable to tap into many high-quality opportunities.
These include investments such as direct holdings in energy transition-related infrastructure, which offer the potential for higher returns, portfolio diversification, and material benefits for the environment and society, as well as energy security.
Today, new structures are being offered to allow private investors to access these types of investments. Private investors are responding to this newfound opportunity, and we are seeing increased demand for assets which both address the energy transition and provide a differentiated risk profile for investors' portfolios.
Here we explain how private investors can access the energy transition investment opportunity, and why a ‘semi-liquid' structure makes sense.
Why energy transition infrastructure?
By 2030, more than $2 trillion is expected to be invested in the infrastructure supporting the energy transition annually[1]. A large proportion of this capital will be directed to traditional renewable energy assets such as wind farms, solar power plants and hydro-electric plants, but capital is also being invested into areas such as green hydrogen production, battery storage and large-scale heat networks.
We have previously explored how this asset class appeals to investors for both economic and sustainability reasons.
While the sustainable outcomes are undeniable, the potential economic benefits to a portfolio are arguably the reason why this is fast becoming such an integral part of wealth investors' portfolios; the energy transition offers investors exposure to diversifying risks and the possibility of strong returns driven by high, stable, and predictable cash flows.
What is a semi-liquid fund?
Semi-liquid funds have been created to make it easier for investors to access, allocate and manage illiquid assets exposures. Traditional illiquid fund structures have always had significant barriers to access for private investors, including high minimums, capital call drawdown structures, and long lock ups.
Within semi-liquid structures, investors can buy and sell at a prevailing Net Asset Value (NAV), with entry and exit points (and rules around those points) that have been developed to provide liquidity in a controlled manner, typically with a cap on how much can be redeemed at any given time, often 5% of NAV. A well-constructed portfolio, diversified by geography, sector, and asset type (and with a potential small allocation to liquid investments, such as listed equity and cash), 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.
Why does a semi-liquid fund make sense for the energy transition?
Investing into illiquid assets is new to many investors, and the semi-liquid structure has been designed to answer the key questions that investors targeting the energy transition might have.
How do I get timely access to the energy transition in a straightforward, but robust way?
Ultimately, the major benefit of semi-liquid structures is the ability to access high quality and differentiating assets that are easy to operate. In the case of energy transition infrastructure, investors can benefit from its risk and return characteristics, which can contribute to better portfolio outcomes, and access the attractive entry point on offer in the market today.
I believe in the energy transition, but what happens if my circumstances change, and I need to get my money back?
The energy transition is a long-term theme, and investors in this space generally have a long-term mindset. However, we recognise investors' needs change over time. While renewable infrastructure investments are typically considered illiquid, semi-liquid funds strike a balance by providing regular access to liquidity. Investors can manage their exposure with the flexibility of periodic subscriptions and redemptions at the fund's NAV.
It's important to highlight that even if semi-liquid funds offer periodical redemptions, these are not as frequent as in mutual funds, which offer daily liquidity. Redemptions are managed through a combination of factors; the high level of cashflow delivered by energy transition assets, a modest holding of liquid assets and, if needed, the ability of the fund manager to sell stakes in energy transition assets to the large and growing marketplace of buyers and sellers.
Sources:
[1] IRENA
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.
This marketing material is for professional clients or advisers only. This site is not suitable for retail clients.
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.
Further Reading
- Partner Insight: Private assets for wealth management clients - why, and why now?
- Partner Insight: Adding return and lowering risk with private assets
- Partner Insight: Private markets myth-busting - Valuing private businesses
- Partner Insight: Deciphering liquidity - Understanding the mechanics of new funds investing in private markets.
- Partner Insight: The attractions of the small-mid private equity segment
