Fund managers ease adviser fears with semi-liquid products

Fund managers are looking to semi-liquid vehicles as a way to reach retail investors who may be nervous about the liquidity of the ever-growing private markets asset class.

Fund managers have been open about their desire to broaden their investor base as they face pressure from passive players as well as open up their product ranges. Morningstar previously detailed how active managers will be unable to compete with passive rivals unless they diversify their product ranges into non-traditional asset classes like private equity and specialist fixed income.

While one area of interest is private markets, as a way to provide a niche to passive competitors, this asset class faces the problem of being less liquid and less transparent than its public market peers, potentially off-putting for retail and intermediary clients.

Financial advisers previously told Money Management they believe further education is needed to help retail clients understand the market. Despite this, Praemium found nearly 70 per cent of HNW-focused advisers cited the asset class as a necessity for meeting client demands in the future and advisers managing client portfolios above $20 million typically have an average of 14 per cent allocated towards alternatives.

As a way around this, firms are considering the launch of so-called “semi-liquid” products which offer greater flexibility and transparency.

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Semi-liquid products are described as those which are open-ended, diversified and provide ongoing access which allows for more frequent redemptions by investors and the ability to exit if economic conditions change. They also allow investments of smaller ticket sizes which are more suited to a retail market rather than the large sums invested by institutional players.

The addition of these products to the marketplace has been described by Morgan Stanley as the “democratisation” of alternatives and has, so far, been seen mostly in the private credit space.

In investor updates, experts from State Street, UBS and Morgan Stanley all described how they have witnessed rises in semi-liquid products.

Patrick Reid, managing director of private markets distribution at Morgan Stanley, said: “For intermediaries and wealth managers, semi-liquid funds are less resource intensive. The need for operational teams to monitor and communicate upcoming capital calls or past calls that an investor may have delayed or missed is far reduced in the semi-liquid format.”

In its market update, State Street global head of alternatives, Scott Carpenter, said: “We are seeing a lot of firms that are now looking to distribute to the mass affluent through wealth channels, and that’s changing the dynamic from typical general partners (GP) and limited partner (LP) funds that might have had a couple hundred investors and now have tens of thousands investors.

“Historically, private markets funds were seven- or 10-year capital locks closed ended. And that was it.

“Now we’re seeing an increase in the number of evergreen funds, the number of open-ended funds. And also semi-liquid products business development companies, interval funds, European Long-Term Investment Fund (ELTIFS), long-term asset funds (LTAFs), all of which offer investors some degree of liquidity, which again is a stressor to the environment where firms haven’t been used to accommodating that type of liquidity.”

However, he said he expected there would be “regulatory challenges” ahead in terms of distribution of these products to the wealth market.

“In terms of distribution to the wealth channels, I expect that there will be regulatory challenges on some of that distribution in terms of the appropriateness of some of the assets and strategies for a broader investor base,” Carpenter said.

ASIC has already announced it will be placing private markets funds under scrutiny, and this will likely include how much of their product is being distributed to the retail marketplace to ensure the providers are complying with their target market determinations.

Meanwhile Markus Benzler, head of multi-manager, and Michael Brunner, portfolio manager for multi-manager private equity, at UBS discussed “evergreen” funds which are open-ended private equity secondary funds. These are gaining popularity, the pair said, because of their flexibility, risk management and enhanced market access. 

“The rise of semi-liquid open-ended secondary funds is a testament to the market’s evolution, offering a compelling option for investors seeking both exposure to private equity and the flexibility of liquidity. 

“The advent of semi-liquid structures has opened the market to smaller investors, including retail investors, who can now participate with smaller ticket sizes. This broader participation is particularly appealing given the increased availability of information and transparency in pricing.

“As the market evolves, the adaptability and innovative spirit of fund managers and investors will be key to navigating the secondaries landscape.”

Reid concluded: “We believe it is only the start of a longer-term secular trend across private markets. Simply put, wealth investors, like their institutional peers, want access to private markets’ potential return and diversification benefits – and now that’s becoming possible.”