Hamilton Lane: Semi-liquid private markets funds lower access barriers for retail investors

Semi-liquid funds are removing the traditional pain points smaller investors currently face when investing in private markets, providing access to a space retail investors have traditionally struggled to access.

Due to their long-term investment horizon, institutional investors have been investing into private markets for a long time, but with the exception of the ultra-high-net-worth market, individual investors have historically struggled to gain access into the space. 

Gildea, head of evergreen funds at the $832bn private markets asset manager, told Investment Week that this was due to complicated fund structures, high minimum investment requirements and the illiquid nature of the underlying assets.

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“Subscribing to a closed-ended private equity fund is painful from an administrative process, your money is locked up for ten to 12 years and understanding the performance of that fund is hard because it reports in a different metric than you are used to seeing,” he said. 

“Then there is the tax reporting element, as well as the high investor minimums that also make it different and more challenging than what most investors like to deal with.”

Some private equity vehicles may require investors to meet qualified investor requirements, which demand investment assets of at least $5m, beyond most individual investors’ reach.

Liquidity

In recent years, access to private markets has expanded due to products designed to appeal to the retail market, which resolve some of the friction associated with standard private markets offerings. 

Semi-liquid private markets funds, popularly known as evergreen vehicles, provide private markets access with a single allocation, monthly or quarterly limited liquidity, investment minimums as low as $10,000 and immediate exposure. 

While these vehicles are growing in popularity, at times of volatility and falling equity markets, semi-liquid funds can become victims of their own success. 

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Last year, Blackstone’s BREIT, Starwood’s SREIT and KKR’s KREST had to limit redemptions after withdrawal requests surged. Like Blackstone’s BREIT, Hamilton Lane’s $3bn evergreen portfolios offers 5% liquidity every quarter. 

“What we say is, this is intended to be a long-term asset class, you should think about how you measure this, how you want to invest or withdraw over years, not weeks or months. The idea is not to think about this on a month to month basis,” Gildea said. 

“Our long-term portfolio needs to be able to generate the liquidity that we are offering investors, but we do have some other mechanisms for other periods of time if the liquidity is not there or redemptions are a little bit higher.”

NAV concentration

Despite the rapid growth of the retail market’s adoption of these structures, NAV is still dominated by a few large players, such as the likes of Blackstone, which manages $250bn on behalf of individual investors, KKR and Apollo. 

Hamilton Lane’s latest Market Overview report found more than 50% of AUM was concentrated in the three largest managers last year. This poses some amount of risk, where the future of semi-liquid funds will be tied to the success of a few managers, the firm argued.

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However, the report also noted that a similar dynamic existed with private equity in the 1980s, with nearly 60% of AUM concentrated in the three largest managers. 

As private equity gained acceptance, a flood of managers have entered the space, decreasing that concentration. According to the firm, this raised the question of whether this will play out within the semi-liquid space as well, or whether there will continue to be a few large winners. 

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