The Explosive Growth Potential of Semiliquid Funds

The investment landscape is undergoing a seismic shift as semiliquid funds emerge as a bridge between the illiquid allure of private markets and the flexibility demanded by modern investors. These hybrid vehicles, which blend the structure of closed-end private funds with periodic liquidity features, are poised for explosive growth. By 2024, assets under management (AUM) in semiliquid funds had surged to $349 billion, a 60% increase since 2022, with projections suggesting a 12-fold expansion to $4.1 trillion by 2030Morningstar’s Guide to Semiliquid Funds^[1]. This trajectory reflects a profound realignment of investor priorities, driven by structural advantages and evolving asset allocation strategies.

Structural Advantages: Liquidity, Fees, and Risk Trade-Offs

Semiliquid funds address a critical gap in the market by offering partial liquidity to assets traditionally locked in private equity, venture capital, and credit. Unlike closed-end private funds, which restrict redemptions entirely, semiliquid structures—such as interval funds and tender offer funds—allow investors to redeem up to 5% of net assets quarterlyMorningstar Releases Report on Semiliquid Funds | MFDF^[2]. This flexibility is achieved through “liquidity sleeves,” where a portion of the fund's assets is held in cash or public securities to meet redemption demands. While this approach slightly dilutes long-term returns compared to fully illiquid private funds, it mitigates the risk of forced asset sales during market stressHow semi-liquid funds can make private equity more flexible^[3].

Fee efficiency, however, remains a double-edged sword. Semiliquid funds typically charge average expense ratios of 3.16%, significantly higher than the 0.37% of passive ETFsMorningstar Releases Report on Semiliquid Funds | MFDF^[4]. Yet, these fees are often more competitive than traditional private equity's 2% management fee and 20% carried interest. For investors seeking exposure to private markets without the high minimums and illiquidity of direct private fund investments, the trade-off is increasingly palatable.

Risk-adjusted returns, meanwhile, present a mixed picture. While private equity and venture capital semiliquid funds have largely underperformed the S&P 500 over the past decade, private credit strategies—often leveraged but with shorter holding periods—have shown promiseThe state of semi-liquid funds^[5]. This divergence underscores the importance of asset selection and fund structure in determining outcomes.

Investor Behavior Shifts: From Exclusion to Inclusion

The meteoric rise of semiliquid funds is inextricably linked to a broader democratization of private markets. Historically, access to private equity and credit was limited to institutional investors and ultra-high-net-worth individuals. Today, regulatory changes and technological advancements are dismantling these barriers.

A pivotal development came in May 2025, when the SEC updated guidance to allow semiliquid funds with over 15% private assets to be offered to non-accredited investors—those with less than $1 million in investable assetsMorningstar Publishes New Semiliquid Funds Report Amid Acceleration of Private Market Access and Investor Interest^[6]. This shift has unlocked a vast new pool of capital, with AUM in these funds growing from $215 billion in 2022 to $344 billion by 2024Private credit drives semiliquid fund growth to $344B - PitchBook^[7]. Complementing this, recent reforms have permitted private equity to be included in 401(k) plans, further embedding these assets into mainstream retirement portfoliosNorth American managers urge semi-liquid private markets fund growth reforms^[8].

Macroeconomic factors also play a role. As investors seek diversification amid rising interest rates and market volatility, semiliquid funds offer a compelling middle ground. For example, private credit strategies—focused on middle-market loans and infrastructure—have attracted $120 billion in inflows since 2023, driven by their potential for stable cash flows and insulation from public market swingsSemi-liquid funds | Deloitte Insights^[9].

Asset Allocation: Bridging the Gap Between Public and Private

Semiliquid funds are reshaping how investors construct portfolios. Traditionally, asset allocation has been a binary choice between liquid public markets and illiquid private assets. Semiliquid structures now enable a nuanced approach, allowing investors to balance liquidity needs with the higher returns typically associated with private markets.

For instance, semi-liquid secondary funds—investing in existing private equity stakes—offer diversification across vintage years and asset types, reducing concentration riskThe rise of semi-liquid secondaries funds | UBS Global^[10]. These funds also provide flexibility to adjust holdings based on macroeconomic signals, a feature particularly valuable in an era of rapid technological disruption and regulatory change.

Wealth managers are increasingly incorporating semiliquid funds into client portfolios to address liquidity preferences. A 2025 Morningstar report noted that 68% of advisors now allocate at least 5% of client assets to semiliquid alternatives, up from 32% in 2022Morningstar Publishes New Semiliquid Funds Report Amid Acceleration of Private Market Access and Investor Interest^[11]. This trend is mirrored in institutional portfolios, where pension funds and endowments are using these vehicles to meet liquidity requirements without sacrificing private market exposureWhy are institutional investors allocating to semi-liquid funds?^[12].

Challenges and Considerations

Despite their growth, semiliquid funds are not without risks. Liquidity constraints—while less severe than in traditional private funds—can still lead to valuation challenges and redemption delays. Additionally, the higher fees associated with these funds require rigorous due diligence to ensure they align with long-term return objectives.

Investors must also navigate the complexity of fund structures. For example, tender offer funds, which allow redemptions at the manager's discretion, may impose unexpected restrictions during market downturns. Similarly, the performance of liquidity sleeves can vary widely depending on market conditions, affecting overall returnsMorningstar’s Guide to Semiliquid Funds^[13].

Conclusion

Semiliquid funds represent a transformative force in modern investing, offering a unique blend of private market exposure and liquidity that aligns with evolving investor needs. As regulatory tailwinds, technological advancements, and shifting risk-return preferences converge, these funds are set to redefine the boundaries of asset allocation. However, their success will depend on investors' ability to navigate structural trade-offs and align these vehicles with their financial goals. For those willing to embrace the complexity, the rewards could be substantial.