In the coming year, you’ll hear a great deal about private markets and a rather esoteric term called “semi-liquid funds”. For adventurous types, this could present an interesting opportunity — but it also comes freighted with dangers, not least that you may end up being invested in something that could go wrong — and you can’t withdraw your investment in a hurry.
In my last column I wrote about the rise of active exchange traded funds (ETFs) and in a way these represent two sides of the same trend: the overturning of the old fund management world.
It’s not much fun running an active stockpicking mutual fund or unit trust at the moment. You have passive funds grabbing market share on one side, while on the other, you have your sales folk saying everyone and their aunt is getting into private markets. “Let’s launch an active ETF!” is the common refrain you hear from alpha types.
Private markets represent a broad spectrum of underlying opportunities ranging from lending funds (commonly known as private credit) to private equity and taking in other categories, such as infrastructure and venture capital. The idea here is not to invest in stuff on an exchange — that’s increasingly the preserve of ETFs — but to invest in private businesses or loans to private businesses.
Anyone who’s dabbled in investment trusts will be familiar with the varieties of private, or “alternative”, assets, ranging from renewable power and lending money to life sciences firms.
Until recently, they were a useful source of diversification, especially for income investors. In fact, they remain so — just largely in the wrong way.
While growth companies in the tech sector shoot up in price, many alternative funds have fallen sharply in value and now trade at chunky discounts to their net asset value, commonly between 20 and 40 per cent. Although that doesn’t mean they are bad investments, they do make existing shareholders’ lives difficult.
But outside the investment trust universe, private assets are booming. Formerly the preserve of big institutions, private equity, infrastructure investments and private credit are all now being sold aggressively to lesser mortals in the US — not necessarily to Mr and Mrs Miggins of Acacia Avenue, but their wealthy neighbours at the top of the hill: the high-net worths.
In the past, selling private assets to private investors has been tricky. Institutional investors are used to being told they can’t access their money right away as they sign up to become a limited partner in a partnership that typically lasts five to 15 years. They might not put all the money in up front, but they will get regular cash calls to fund investments, and then they need to sit tight and wait for those investments to mature.
Retail investors, on the other hand, are used to trading on public exchanges, where they can buy and sell their shares in nanoseconds and get the cash (almost) immediately. If you are worried that a sector is going to hell in a handcart, you can just trade out — this is precisely what happened a few years ago to listed venture capital funds such as Chrysalis or Molten Ventures (which invest in private assets, namely early-stage businesses).
The word got out that valuations were crumbling and IPO pipelines were freezing up. Investors sold quickly, even though the valuations on the funds weren’t (yet) falling dramatically. Big discounts opened up, which made long-term trust investors very miserable.
So how come everyone is getting into private markets now? Well, a canny piece of marketing is at play.
Clearly, you can’t allow any old neighbour of the Migginses into your long-dated institutional fund. You could tell them to buy into a liquid investment trust which puts money into roughly the same things, but they might be put off by those discounts — “what happens if those discounts just hang around for years on end?” they might say, with some validity.
So instead, you open up a substructure that lets private investors buy into long-term funds, but you slap restrictions on them, all via what’s called a “semi-liquid fund”. With these, investors can only access their money once every month, quarter or year, and even then only withdraw 5 or 10 per cent. They also have to sign paperwork that says they are knowledgeable and smart investors who “understand the risks”.
At this point, you might think I’m being cynical because I talk about it as a marketing ploy to get more fresh cash into private assets — and there is some truth to that — but it’s not the whole story. A semi-liquid fund is a real opportunity because it allows you to invest in private asset funds that might be very attractive.
For example, WealthClub, an investment service, has its own private assets platform where you can invest directly in OakTree distressed debt funds, which many professionals regard as world-class. You can also invest directly through WealthClub in the HgCapital Fusion funds, which also pop up in the portfolio of the HgCapital investment trust — rightly popular, its shares have frequently traded at a premium to NAV in the past year.
At Moonfare, another online platform, there’s a huge range of hard-to-access, top-of-class funds, many in the private equity sector. And big fund managers such as Schroders are also making waves, taking in large sums for their semi-liquid funds that are private equity-oriented.
And lest we forget, more top-rate businesses are choosing to stay private for longer, robbing the public markets in places like the UK of investable businesses. If you want to access the full range of corporate UK plc or US Inc, ignoring private businesses increasingly looks like a reckless move.
Is 2025 the year semi-liquid funds make it into your portfolio? The trick, as always, is to work out when the big fat pitch is just that or whether you really are being sold into a smart investment with long-term potential. Then you have to ask yourself: are you willing to let your capital sit there for the next x years and grow in value?
The good news is that this year might also be a decent one for private equity, the largest bit of this spectrum of private assets. As analysts at Deutsche Numis point out when talking about listed private equity investment trusts, the cycle is looking positive, especially for private equity firms that focus on resilient sectors with high levels of recurring revenues (such as software, business services, education and healthcare). It also helps if you have a manager who uses their controlling stake to deliver operational improvements, margin expansion and value-accretive M&A.
The Numis analysts expect average ebitda growth of 16 per cent for businesses in leading private equity portfolios, which should help drive growth in net asset value in the medium term.
I’d be inclined to go along with their view that there is “an improving outlook for realisations and an easing macro environment”. That should benefit both listed private equity firms and their semi-liquid structures opening up to private investors.
The author has no holdings in semi-liquid funds but invests in HgCapital investment trust.
