Semiliquid Funds Are Coming for Your Portfolio. Are You Ready for Them?

Flocks of semiliquid funds purporting to offer exposure to private assets are vying for a perch in your portfolio.

Even if these investment offerings seem new to you, they are not new inventions. Neither is the idea of mixing public and private assets in funds. They’ve been intermingling in closed- and open-ended vehicles for a while, albeit out of the spotlight they’ve recently attracted.

Asset managers have been using numerous modes to deliver illiquid credit, equity, infrastructure, and real estate securities to investors who are more used to ready liquidity. Here’s a guide to how these vehicles work.

What Are Semiliquid Funds?

First, some definitions.

Semiliquid vehicles facilitate investor access to investments and strategies normally found in hedge funds and private capital funds. Though semiliquid vehicles don’t offer daily opportunities to sell (like exchange-traded funds and mutual funds), they offer more chances to redeem shares than these investments do on their own. They typically lock up assets for months, quarters, or years.

You’ll also hear terms like evergreen, perpetual capital, and semiliquid used in reference to anything that allows investors to buy and sell intermittently and that don’t sunset on a predetermined date like private limited partnerships. The jargon is thick around funds trafficking in private assets, so read the fine print carefully.

Though semiliquid funds open previously hard-to-reach asset classes to smaller investors and force investors to be patient, they are also pricier, less transparent, and full of risky assets that may prove harder than anticipated to sell if or when investors rush for the exits.

Here’s a breakdown of the main types of semiliquid funds.

The Limits of Mutual Fund and ETF Investments in Private Assets

Mutual funds and ETFs, known for investing in public securities, have been dabbling in private assets for years.

They’ve kept it to dabbling because the Securities and Exchange Commission requires them to keep at least 85% of their assets in liquid securities to satisfy frequent shareholder redemptions. In practice, most of them put nearly all their money in liquid holdings. Some, however, have bought private assets with their 15% illiquid security allotments.

Mutual funds and ETFs are established, regulated, transparent, and cheap compared to hedge and private funds.

As an entrée to private markets, though, they have limitations. Private holdings haven’t and likely won’t claim more than a portion of open-end funds, despite some speculation that the SEC may relax its cap. It’s also not always clear how open-end funds trade and value illiquid securities.

Furthermore, the results of open-end funds’ private markets forays are mixed at best. Through 2024, mutual funds’ aggregate returns from private holdings lagged those of the S&P 500, according to Morningstar research.

Despite some high-profile successes, like Baron Asset Management Founder Ronald Baron’s SpaceX investment and Fidelity Contrafund skipper Will Danoff’s purchase of Meta Platforms when it was still private, evidence of public market managers consistently picking public market-beating private company stocks is scant.

Investing in Private Assets With Listed Closed-End and Semiliquid Funds

These offerings can own hard-to-trade private assets, and they are not subject to the SEC’s illiquid holding cap, but they can be arcane.

The following fund types all fall under the closed-end fund umbrella, but each with its own twist. Nontraded REITs that own direct real estate fall into this bucket, too, but they have their own idiosyncrasies and Morningstar is not rating them at this time.

Listed Closed-End Funds

Listed closed-end funds have long invested in private assets because they do not need to meet daily redemptions.

They raise a fixed amount of money via initial public offerings—and sometimes through subsequent offerings—and their shares trade like ETFs. Unlike ETFs, though, their fund shares’ market prices usually trade at discounts and sometimes premiums to their portfolios’ net asset values.

Interval Funds

It’s easier to get into these listed closed-end fund cousins than it is to get out of them.

Interval funds skirt the SEC’s illiquid holding cap by limiting shareholder redemptions. They must offer investors at least one chance per year to sell 5% to 25% of outstanding shares, but many offer more frequent—often quarterly—redemption windows. That’s a more predictable cadence, but it could still take seven days per redemption window for investors to get their money, and the funds can charge up to 2% repurchase fees. So, redemption periods can be inconvenient.

If repurchase requests exceed an interval fund’s available cash, for example, investors may only be able to sell some of their shares.

Tender Offer Funds

Tender offer funds do not trade on exchanges but can continuously issue new shares like open-end funds or ETFs, albeit more irregularly.

Once in a tender offer fund, investors can only sell during one of its periodic offers to repurchase a percentage of outstanding shares at net asset value.

Unlike interval funds, tender offer funds have complete discretion over the timing of their buybacks. The funds and their boards set the schedules—usually quarterly or annually—and can delay payments if their holdings are particularly hard to sell.

Nontraded BDCs

Business development companies are a type of closed-end fund that provides loans or equity financing to small and medium-size businesses that have difficulty accessing traditional sources of capital.

BDCs can be publicly traded, nontraded, or privately offered. The first type trades on a securities exchange; the latter two don’t. Nontraded BDCs are considered semiliquid funds.

BDCs often invest in senior secured loans, subordinated debt, and common or preferred stock and often offer attractive yields because they must distribute 90% of their taxable income. Those yields, however, derive from leveraged bets on very small, distressed, speculative, or indebted companies.

Private Funds

These are registered with the SEC but are not regulated. This is where the bulk of private investments lie and are often only available to qualified purchasers or accredited investors.

Some of them are drawdown funds that exist for a finite period, and others are evergreen, meaning they carry on indefinitely. Even these funds have blended public and private holdings.