Vehicle structure is critical when assessing the liquidity enhancements of a blended public and private investment portfolio. Historically, private investments were available primarily to larger institutional investors through traditional private funds, which are closed-ended, with high minimum investments and capital locked in for the term of the fund. Investors’ capital is invested over a period of time, often requiring multi-year commitments, and strict limits are placed on when capital can be taken out – largely related to the duration of the underlying investments.
While this may work well for larger corporate investors, small to mid-sized corporations and pensions, insurance companies, and high-net-worth individuals may be seeking more liquid options.
Many investors appear to be seeking the benefits of such blended public and private portfolios through vehicles with daily liquidity, such as open-ended 40 Act mutual funds. However, these typically have a cap (15%) on investments in illiquid holdings, thereby limiting access to illiquidity premium potential. Running costs for 40 Act funds are also typically higher due to higher regulatory, legal, compliance, and administrative expenses associated with managing such vehicles.
Other semi-liquid structures include 40 Act interval funds as well as privately offered open-ended funds, commonly used for illiquid asset classes. Characteristics include no fixed term, meaning there is no set date for the fund or its investments to be liquidated. These funds can provide a degree of liquidity, such as quarterly redemptions, but with a cap on the amount withdrawn each period to protect existing investors from the negative impact of concentrated outflows. Such vehicles are typically not subject to daily dealing, as are mutual funds, and can serve as a robust portfolio diversifier to traditional equity and fixed income investments. Interval funds may also be subject to 40 Act diversification and concentration limits similar to mutual funds, incurring higher administrative and compliance costs, and may not be suitable for non-US investors.
An advantage of evergreen structures with no fixed term, such as privately offered open-ended funds, is that they allow investors the ability to continuously raise and invest capital. Investment managers may have the ability to recycle capital more efficiently between assets relative to closed-ended private funds, which may provide less efficient capital drawdown and liquidation mechanisms. This aspect has been viewed as an important benefit to investors because it may enable them to capture the illiquidity premium of private markets from the first day of investment.
For illustrative purposes only. *Valuations of closed-end funds are for informational purposes only and not available for investors to subscribe to or redeem interests in the fund once it has closed.
For investors who may not have the ability to fully allocate to separate asset classes, a blended portfolio may be of interest, as it aims to provide exposure to both public and private markets through one vehicle. Investors seeking such diversification should consider managers with strong competencies in both asset classes. This means teams with experience managing assets (both public and private) across economic cycles and industries – and the importance of robust due diligence and underwriting cannot be overstated. Also critical are deep relationships with sponsors, which contribute to consistent deal flow.
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