Semiliquid Funds: The Preferred Vehicle for Private Assets with Limited Withdrawals

Semiliquid funds, such as interval funds, have become the preferred vehicle for investing in private assets due to their limited withdrawal options. This allows them to hold illiquid assets that may be difficult to sell quickly at a fair price. Semiliquid funds have been gaining traction since the early 2000s, particularly for investing in bank loans, which are considered private assets. This has led to the growth of the interval fund category, with many mutual funds and ETFs now investing in these harder-to-trade loans.

Semiliquid funds, such as interval funds, have emerged as a favored vehicle for investing in private assets due to their limited withdrawal options. This feature allows them to hold illiquid assets that may be difficult to sell quickly at a fair price. Semiliquid funds have gained traction since the early 2000s, particularly for investing in bank loans, which are considered private assets. This trend has led to the growth of the interval fund category, with many mutual funds and ETFs now investing in these harder-to-trade loans.

The SEC proposed the interval fund concept in 1992, just before the debut of the first ETF in 1993. Both fund types were introduced to address the persistent discounts of listed closed-end funds. While ETFs have been more successful, interval funds have found their niche by offering investors access to illiquid assets, such as bank loans. In the early 2000s, interval funds were primarily used to invest in bank loans, which are private assets but can be liquid enough for mutual funds and ETFs to own.

The growth of interval funds has been remarkable. For instance, Blackstone Real Estate Income Trust (BREIT) launched in 2017 and has grown to $53 billion in net asset value. Similarly, Blackstone Private Credit (BCRED) launched in 2021 and now has a net asset value of $44 billion. Cliffwater Corporate Lending (CCLFX), a private credit interval fund launched in 2019, now has more than $30 billion in assets. These funds have attracted significant assets, and competitors have rushed to duplicate their success.

Traditional and alternative asset managers have seized on interval funds as the preferred vehicle to offer private assets to regular advisors and investors. Almost all the 93 interval funds launched since the start of 2019 have offered investors access to private markets, typically private credit. Direct lending deals, which are like broadly syndicated loans but involve smaller companies and fewer investors, are the most common type of private credit.

While interval funds have become the preferred vehicle for private assets, other semiliquid funds, such as tender-offer funds and nontraded REITs and BDCs, also play a role. Nontraded REITs invest in real estate, while nontraded BDCs are required to lend to small and medium-sized US companies. Tender-offer funds, which give asset managers more flexibility to manage redemptions, have been used to invest in harder-to-trade assets like private equity.

Semiliquid funds have made often murky, less liquid private assets more accessible. However, it's crucial for advisors and investors to understand what they own. Private assets can be illiquid, and public securities can be deeply illiquid. Public securities like micro-cap equity, various structured credit instruments, and some high-yield bonds can be deeply illiquid. Similarly, broadly syndicated bank loans are private assets but can be liquid enough for mutual funds and ETFs to own. Certain restrictions, such as post-IPO lockups or access to material nonpublic information, can make an asset simultaneously liquid and illiquid, depending on the investor.

In conclusion, semiliquid funds have become the preferred vehicle for investing in private assets due to their limited withdrawal options. This feature allows them to hold illiquid assets that may be difficult to sell quickly at a fair price. Semiliquid funds have gained traction since the early 2000s, particularly for investing in bank loans, which are considered private assets. This trend has led to the growth of the interval fund category, with many mutual funds and ETFs now investing in these harder-to-trade loans.

References:
[1] https://www.morningstar.com/alternative-investments/how-semiliquid-funds-became-preferred-vehicle-private-assets
[2] https://www.morningstar.com/funds/brief-history-private-asset-investing-mutual-funds