Semi-liquid funds: how to profit from private markets
Private markets offer alluring opportunities. From the fastest-growing firms to the infrastructure that will deliver net zero, the assets with the potential to yield the most exciting returns in the years ahead are not to be found in public arenas such as stock exchanges and bond markets. You’ll need to invest privately.
However, that is a problem. It’s tricky to access private markets if you’re an ordinary retail investor. There are plenty of collective funds that offer exposure to these assets, but these private-equity, private-credit and infrastructure funds are largely the preserve of institutional investors, such as pension funds and insurers.
They require big minimum investments, and investors may be expected to lock up their money for years. However, this is beginning to change. The large investment managers active in private markets recognise that demand for these assets is broadening, and they’re keen to raise more funds. BlackRock, for example, has just announced it wants to raise $400 billion to invest.
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Enter semi-liquid private markets funds: a growing sector of specialist collective funds targeting a retail-investor base with much lower minimum investments and far easier redemption terms. You can get into these funds for as little as £10,000 and you can typically get your money back quarterly. The vehicles were first launched in the US, where they’ve raised more than $380 billion, but there are now a growing number of semi-liquid funds available in the UK too.
“Semi-liquid funds offer a more flexible way for individual investors to access private equity and other private markets,” explains Alex Davies, the founder and CEO of Wealth Club, which launched a platform last year that facilitates access to around 15 of these vehicles. “The investment is ‘evergreen’, meaning you can invest when you like, and when you invest, your capital is deployed across the full portfolio. You can also ask to redeem your investment on a rolling basis – usually once per quarter.”
Big names and big opportunities
The fund managers offering these evergreen funds include well-known UK managers such as Aberdeen and Schroders, as well as some of the world’s biggest names in private-markets investment – Apollo, Brookfield and Oaktree, for example. Private-market investments can be split into three groups.
Firstly, most investors will be familiar with the concept of private equity – companies without a stock market listing – but this is still a broad asset class. It ranges from very early-stage businesses that may not even have begun to generate revenues (start-ups) to large companies that have opted not to list on a public market. More and more firms have decided that public markets – with all the administration, regulation and scrutiny they bring – are not for them. There are 159,000 businesses globally with revenues of more than $100 million, but only 19,000 of them are listed. Examples include SpaceX and OpenAI.
Private credit is the second area of focus for evergreen funds. This is debt finance provided to firms and other borrowers by non-bank lenders. This huge market has grown rapidly in recent years as banks have retreated from lending due to tougher solvency regulations. That has seen a slew of alternative lenders fill the gap with a wide array of debt products; these lenders raise money from investors in the private credit market so that they can keep making new loans.
Supporting decarbonisation
Thirdly, the infrastructure sector is an ever more important part of private markets. From energy transmission grids to solar and wind farms, it spans a broad range of assets underpinning global efforts to decarbonise. It also includes road and rail transport networks, ports and logistics facilities, and even digital infrastructure, such as data centres.
All of which prompts two questions. Do these asset classes offer return potential that you can’t get from conventional public markets, and are semi-liquid funds a sensible way to access that potential? On the first question, Nalaka De Silva, head of private market solutions at Aberdeen Asset Managers, believes the answer is a resounding yes.
“The traditional 60:40 portfolio is no longer doing the job,” he says, referring to the long-established split of investments between equities and bonds to target growth with some downside protection. Bond markets have become far more volatile, he notes, undermining their ability to provide diversification.
“Meanwhile, a new set of opportunities have emerged, with the potential to generate strong returns – both capital and income – over the long term,” Da Silva argues. The best companies are no longer to be found on public exchanges, he argues, while the private-credit boom gives investors access to portfolios of loans that provide generous income streams.
Infrastructure investment, meanwhile, is critical worldwide, both in the context of net zero and as the global population grows, urbanises and digitalises. “Private markets have consistently delivered superior performance over the past 30 years,” adds Tim Boole, head of product management private equity at Schroders Capital. “I believe these assets can continue to generate a premium.”
Investors in private markets also tend to be focused on risk management, Boole points out. Large parts of these asset classes provide returns that exhibit low levels of correlation with public markets – that is, they can offer an alternative source of positive performance when equities and bonds are struggling. “You do get diversification benefits that have become harder to find elsewhere,” Boole says.
Evergreen funds’ structures do have drawbacks. Most obviously, you can only withdraw your capital once a quarter; even then, most funds reserve the right to limit redemptions or bar them altogether during periods of market stress or high demand for withdrawals from investors.
You’ll also pay big fees for these funds. Managers insist the hands-on work required to manage private-market assets justifies the expense, but higher charges are still a drag on performance. Typical ongoing fees of 3%-4% are far higher than in a traditional fund.
And while evergreen funds are helping to democratise private markets, they’re not aimed at the mass market. Managers will typically ask you – or your adviser – to certify that you’re a high-net-worth or sophisticated investor. That means you have an income of at least £100,000 a year or investable assets of £250,000.
The liquidity problem
Given these concerns, Ben Yearsley, an investment consultant at Fairview Investing, says he’s sceptical. “Do investors really understand the semi-liquid nature of their holdings?” he asks. “When you invest, you may be happy with a three- or six-month notice period, but when you need the cash urgently, you’ll forget about the lock-up and wonder why you haven’t got access to your money.”
Moreover, says Yearsley, retail investors already have an alternative way into private markets through the dozen or so investment trusts with portfolios of such assets. These funds offer far superior liquidity in that you can buy or sell their shares on the stockmarket each day. “The high-quality investment trusts in this [sector] are ideally suited to private investors,” Yearsley says. “Pantheon International (LSE: PIN) and NB Private Equity Partners (LSE: NBPE) are good options.”
On the other hand, the structure of investment trusts – with shares that provide exposure to the fund’s underlying assets – means they can trade at discounts or premiums to the value of their investments. That creates added complexity for investors to deal with. “Investment trusts are unique to the UK, which leaves them vulnerable to the sentiment of UK investors,” adds Schroders’ Boole. “It also makes it difficult for them to build any kind of scale, which limits the type of investments they can make.”
In that context, the new breed of semi-liquid funds offer exposure to a broader set of private-market opportunities, with choices less likely to be fettered by size or geographical constraints. The open-ended nature of the funds means there are no discount issues to worry about, although managers must maintain some cash in their portfolios to meet redemptions.
Davies believes this proposition will attract increasing numbers of investors. “Private markets are not suitable for everyone, but for more experienced investors, there is a strong case for making an allocation,” he argues. “This is a pivotal moment – the US has already seen a big shift into evergreen funds, and the UK is now poised to follow suit.”
There are no guarantees that private markets will outperform. The asset class as a whole underperformed US stocks last year – and lags over several longer-term periods as well. This underlines the importance of accessing private markets through well-managed funds with a strong record.
With that in mind, we asked Wealth Club’s Alex Davies to pick his three favourite semi-liquid funds.
Where to look now
“Eqt nexus started life backing niche Swedish companies… Today it’s Europe’s largest private-equity investor, with €269 billion of assets under management across private equity, property and infrastructure. Underlying investments include UK-based Bloom Fresh International, one of the world’s largest premium fruit-breeding companies, and SHL Medical, a global market leader in advanced disposable and reusable drug-delivery systems. The fund targets an annual return of 12%-15% a year, delivering 20.2% between June 2023 and March 2025.”
Davies also highlights Apollo US Private Credit Fund. “Apollo is one of the world’s largest private-credit investors, with $641 billion in credit assets under management. This massive firepower means Apollo can lend directly to larger businesses that might historically have relied on banks or the bond market. The fund invests in senior-secured loans from large US corporate borrowers; it may also invest up to 20% of assets in non-US deals. Investments have included a £684 million loan to Asda as part of its buyout from Walmart… The fund targets a 7%-9% distribution yield, with a current yield of 7.65% after fees. Its holdings are predominantly floating-rate loans, so the yield will rise and fall with central bank interest rates.”
Finally, consider the Franklin Lexington PE Secondaries Fund. “Traditional private-market investments are long-term and illiquid, with investment timeframes stretching over a decade or more. It’s not unusual for large institutional investors to exit their investment before the fund itself wraps up, often by selling their stake to another investor – usually at a discount. Alternatively, a fund manager may [feel that] an investment [could] deliver further returns even though the current fund is [near] the end of its life.
“It might look to build a coalition of investors… prepared to extend the life of the fund or asset. Secondary transactions such as these have a number of advantages. Buying stakes in existing funds can quickly build a diversified portfolio of mature investments, while sellers often offer a discount to sweeten the deal. The Franklin Lexington PE Secondaries Fund… aims to provide broad exposure to the secondary opportunities that Lexington backs.”
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