Asset owners cautioned on risks of semi-liquid funds
As more semi-liquid funds emerge in the private marketplace, institutional investors are being cautioned against investing through these funds’ non-institutional sleeves, where different liquidity profiles could potentially impair performance.
However, some industry participants believe the rise of such funds could enhance private market transparency, as additional regulations may be introduced to protect individual investors.
Semi-liquid funds are unlisted investment vehicles that sit between traditional open-ended mutual funds and typical private asset funds, offering increased flexibility with shorter redemption periods.
This relatively new investment solution allows asset managers to alleviate fundraising and fee pressures by tapping into a broader investor base, particularly wealthy individuals.
Large alternative asset managers commonly offer semi-liquid funds, such as the Blackstone Real Estate Income Trust (BREIT), the KKR Real Estate Select Trust, and the Apollo Perpetual Capital Vehicles.
These funds attract a diverse investor base, including institutional investors, family offices, and ultra-high and high-net-worth individuals.
STAY CAUTIOUS
“Mercer recommends that institutional investors not invest through retail fund sleeves or feeders because it is generally more expensive compared to institutional asset classes,” said Johnny Adji, Asia alternatives leader at Mercer.
“In addition, given the relatively impatient nature of retail investors, this could result in a significant redemption queue, which may force the fund manager to sell assets at below net asset value,” Adji told AsianInvestor.
Some institutional investors may invest through retail shares to access capacity-constrained, niche or popular strategies, or test new strategies before larger allocations.
Adji flagged another concern: the liquidity options may pose risks to institutional investors in stressed market conditions.
“Given the illiquid nature of these investments, there is a real risk that in stressed market conditions, the manager may decide to stop redemption, effectively ‘gating’ the existing investors from redeeming their investments as we have seen recently in a number of global core real estate funds,” he said.
Agreeing with Adji, a partner at an Asia private credit firm noted that while retail participation aids fundraising efforts, it also presents challenges to general partners' (GPs) ability to manage liquidity.
“Asian retail investors, for example, often make swifter buy or sell decisions than institutions, complicating liquidity management for investment managers,” the partner told AsianInvestor.
DRIVE TRANSPARENCY
Despite the challenges and risks, some industry players believe semi-liquid funds and retail participation could spur regulation boosting market transparency.
“Now that you've had retail investors, you just tend to see more regulation follows because those individuals don't have the same bandwidth to lose money,” Alex Popp, global head of sales and account management for private markets at Charles River told AsianInvestor.
He noted that tighter oversight will effectively lead to better valuation transparency in a market with opaque prices.
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“Increased retail participation in private asset classes is likely to drive increased transparency in those products and possibly competing products,” said Dominic James, partner at law firm Sidley Austin.
When Hong Kong opened virtual asset exchanges and exchange-traded funds (ETFs) to retail investors, regulators imposed stricter rules to protect less experienced retail investors from potential losses, he cited as an example.
“In the US and Europe, true retail offerings are through regulated products, which have specific transparency requirements and may somewhat alter the landscape, although we have not seen those products broadly offered in Asia,” he told AsianInvestor.
In Hong Kong, a mixture of both structural (high minimum investment thresholds) and regulatory (narrow private placement exemptions) constraints gate retail participation in private funds, he noted.
“Accordingly, expanding retail participation in private markets in other asset classes more generally would therefore require careful regulatory oversight to protect less experienced investors from losses - in the same way we have seen in the virtual asset classes,” he added.