How private markets can benefit retail investors with the aid of semi-liquid funds

Investment trusts provide access to alluring opportunities in unlisted assets and companies around the world

Another option for wealthy and well-experienced investors are semi-liquid funds.

Opportunities are enticing in private markets. Public arenas like stock exchanges and bond markets do not contain the assets that have the potential to generate the most exciting returns in the years to come, from the fastest-growing companies to the infrastructure that will deliver net zero. You will have to make private investments.

That is a problem, though. Accessing private markets as a typical retail investor is challenging. Although many collective funds provide exposure to these assets, institutional investors like insurers and pension funds dominate the private equity, private credit, and infrastructure funds market.

They may demand that investors lock up their funds for years and have high minimum investment requirements. Nevertheless, things are starting to shift. Due to their recognition of the expanding demand for these assets, the major private market investment managers are eager to raise additional capital. For instance, BlackRock recently declared its intention to raise £400 billion for investments.

Then come semi-liquid private markets funds, a burgeoning category of specialized collective funds with much simpler redemption terms and much lower minimum investments aimed at retail investors. You can invest as little as £10,000 to access these funds, and you can usually expect to receive your money back every three months. Since their initial launch in the US, the vehicles have raised over £380 billion, but an increasing number of semi-liquid funds are now accessible in the UK as well.

"A more flexible way for individual investors to access private equity and other private markets is through semi-liquid funds," says Alex Davies, founder and CEO of Wealth Club, which last year introduced a platform that makes it easier for investors to access about 15 of these vehicles. Since the investment is evergreen, you can make it whenever you'd like, and your money will be spread throughout the entire portfolio. Additionally, you have the option to request a rolling redemption of your investment, typically once every quarter.

Big names, big chances.

Well-known UK fund managers like Aberdeen and Schroders, as well as some of the biggest names in private-markets investing worldwide, like Apollo, Brookfield, and Oaktree, are among the fund managers providing these evergreen funds. There are three categories of private-market investments.

To begin with, the majority of investors will be aware that private equity firms are a broad asset class even though they are not listed on the stock exchange. It includes large corporations that have chosen not to list on a public market as well as very early-stage companies known as startups that may not even have started to make money. An increasing number of businesses have concluded that public markets, with all the oversight, regulation, and administration they entail, are not for them. Of the 159,000 companies with over £100 million in revenue worldwide, only 19,000 are listed. SpaceX and OpenAI are two instances.

Evergreen funds are also concentrating on private credit. Non-bank lenders offer this type of debt financing to businesses and other borrowers. In recent years, this enormous market has expanded quickly as banks have shied away from lending as a result of stricter solvency requirements. Many alternative lenders have stepped in to fill the void by offering a diverse range of debt products; these lenders continue to make new loans by raising capital from investors in the private credit market.

Assisting with the decarbonization.

Thirdly, the private markets are increasingly reliant on the infrastructure sector. Global efforts to decarbonize are supported by a wide range of assets, including solar and wind farms as well as energy transmission grids. In addition, it comprises ports and logistics facilities, networks of roads and railroads, and even digital infrastructure like data centers.

This raises two questions. Aberdeen Asset Managers' head of private market solutions, Nalaka De Silva, believes that the answer to the first question is a resounding yes: do these asset classes offer return potential that is not available in traditional public markets, and are semi-liquid funds a prudent way to access that potential?

He claims that "the traditional 60:40 portfolio is no longer doing the job," alluding to the conventional allocation of investments between bonds and stocks in order to achieve growth with a modicum of downside protection. He points out that the volatility of bond markets has increased significantly, undermining their capacity to offer diversification.

Da Silva contends that "a new set of opportunities have emerged, with the potential to generate strong returns both capital and income over the long term." The best companies are no longer listed on public exchanges, he contends, and investors now have access to loan portfolios with substantial income streams thanks to the private credit boom.

Meanwhile, when it comes to net zero and the urbanization and digitization of the world's population, infrastructure investment is crucial everywhere. "Over the past 30 years, private markets have continuously produced superior performance," says Tim Boole, head of product management for private equity at Schroders Capital. "These assets, in my opinion, have the potential to continue producing a premium.

Boole notes that risk management is also a common concern for private market investors. When equities and bonds are having trouble, a significant portion of these asset classes can provide returns that show little correlation with the public markets, meaning they can provide a different source of gain. "It's harder to find diversification benefits elsewhere," Boole says.

Evergreen fund structures are not without their problems. It goes without saying that you can only take your money out once every quarter, but even then, most funds reserve the right to restrict or completely prohibit redemptions during times of market stress or high investor demand.

For these funds, you will also have to pay high fees. Performance is still hampered by higher fees, despite managers' claims that the practical work needed to manage private-market assets justifies the cost. Regular recurring fees of 34% are significantly more than those of a conventional fund.

Furthermore, even though Evergreen funds are democratizing private markets, the mass market is not their target. Usually, managers will request certification from you or your advisor that you are a sophisticated or high-net-worth investor. This indicates that you make at least £100,000 annually or have £250,000 in investable assets.

The issue of liquidity.

Ben Yearsley, an investment consultant with Fairview Investing, says he is skeptical in light of these worries. He queries, "Do investors really understand the semi-liquid nature of their holdings". "When you invest, you might be content with a notice period of three or six months, but when you need the money immediately, you'll forget about the lock-up and question why you can't access it.

Additionally, according to Yearsley, there are already a dozen or so investment trusts that hold portfolios of these assets, giving retail investors another avenue to access private markets. The fact that you can buy or sell these funds' shares on the stock market every day gives them far better liquidity. "Private investors would benefit greatly from the high-quality investment trusts in this sector," states Yearsley. Both NB Private Equity Partners (LSE: NBPE) and Pantheon International (LSE: PIN) are wise choices.

However, because investment trusts are structured with shares that expose investors to the funds' underlying assets, they are able to trade at prices that are lower or higher than the value of their investments. For investors, this adds another layer of complexity. According to Schroders Boole, "because investment trusts are exclusive to the UK, they are susceptible to the sentiment of UK investors." Additionally, it hinders their ability to grow on any scale, which restricts the kinds of investments they are able to make.

In that regard, the new generation of semi-liquid funds provides exposure to a wider range of private-market opportunities, with less likely to be limited by geographical or size-related factors. Although managers must keep some cash in their portfolios to cover redemptions, the open-ended nature of the funds eliminates the need to worry about discount issues.

Davies is confident that this proposal will draw more and more investors. He contends, "There is a strong case for making an allocation for more experienced investors, but private markets are not suitable for everyone." "The UK is now ready to follow the US, which has already witnessed a significant shift towards evergreen funds. This is a critical moment."

The performance of private markets is not guaranteed. In addition to underperforming US stocks last year, the asset class as a whole also lags over a number of longer time periods. This emphasizes how crucial it is to gain access to private markets through reputable, well-managed funds.

We asked Wealth Clubs' Alex Davies to select his top three semi-liquid funds in light of this.

Now where to look.

"EQT Nexus began by supporting specialized Swedish businesses. With 269 billion in assets under management across infrastructure, real estate, and private equity, it is currently the biggest private equity investor in Europe. One of the biggest premium fruit breeding companies in the world, Bloom Fresh International, based in the UK, and SHL Medical, a market leader in cutting-edge disposable and reusable drug delivery systems, are among the underlying investments. Between June 2023 and March 2025, the fund will yield 20.2% on average, with an annual return of 1215%.

Apollo US Private Credit Fund is also highlighted by Davies. Apollo is one of the biggest private-credit investors in the world, managing £641 billion in credit assets. Apollo can now lend directly to bigger companies that might have previously depended on banks or the bond market thanks to its enormous firepower. In addition to investing up to 20% of its assets in non-US transactions, the fund makes investments in senior-secured loans from major US corporate borrowers. As part of its acquisition of Walmart, Asda received a loan of £684 million. With a current yield of 7 to 65 percent after fees, the fund aims for a distribution yield of 7 to 9 percent. Since floating-rate loans make up the majority of its holdings, the yield will fluctuate in tandem with changes in central bank interest rates.

Lastly, take a look at the Franklin Lexington PE Secondaries Fund. "Investment periods for traditional private-market investments are ten years or longer, and they are illiquid and long-term. Large institutional investors frequently sell their stake to another investor, usually at a discount, in order to withdraw their money before the fund itself closes. Alternatively, a fund manager might believe that even though the current fund is nearing the end of its life, an investment could yield additional returns.

It might attempt to form an investor coalition. ready to prolong the asset's or fund's life. Secondary transactions like these offer several benefits. A diversified portfolio of well-established investments can be swiftly assembled by purchasing shares in already-existing funds, and sellers frequently provide a discount to make the transaction more appealing. The Fund for Franklin Lexington PE Secondary Education. intends to offer extensive visibility to the secondary opportunities that Lexington supports.