Worries over the illiquid nature of alternatives, especially private equity ones, have been voiced in the past as asset owners diversify for extra returns. But while liquid or semi-liquid private equity funds that offer redemption windows could ease investor concerns over having their capital locked in for long periods, industry experts say would-be limited partners should prioritise the vehicle’s exposure before making any commitments.
“When investing in private equity funds, considerations of the fund's structure will come in after understanding the exposure. It depends on what industry and geography the fund is targeting,” Drew Suthipongchai, investment director of single-family office Ferretto Capital, told AsianInvestor.
“If it's a fund that invests in distressed assets, that tends to be a fairly specialised area. You need to do due diligence which would be quite different to if you are investing a fund that invests in well-known late-stage venture capital-backed tech companies,” said a private equity specialist.
While private equity funds that provide liquidity are beneficial to an investor's portfolio, the asset allocation decision is still driven by returns, said a Hong Kong-based insurance investment expert.
“Liquidity is always good. But [it] depends on how much illiquidity premiums will be sacrificed,” the executive added.
Indeed, a thorough understanding of private equity funds that offer redemption windows would take precedence over the structure itself because the underlying assets will need to generate profits before managers can distribute returns.
Julie Leung, deputy chief executive of Hong Kong’s Securities and Futures Commission, recently said at the Asia Financial Forum that the regulator would be “very focused” on liquidity risks in the asset management industry. She highlighted the need for managers to uphold their funds’ liquidity in case redemption requests arise.
The illiquid nature of private equity assets has made it difficult to value portfolio companies and calculate fees under the standard 2/20 model. The supply of liquid private equity funds has historically been low compared to traditional close-ended vehicles. Even semi-liquid funds are only offered by a small number of managers at the moment.
And even those may not be truly liquid.
“Remember that fund managers can always gate a fund if there are too many redemption requests,” said the specialist.
Whether or not a private equity fund can afford redemption windows also depends on how it is constructed.
In Schroders’ case, the global head of private assets, Georg Wunderlin, said that the firm’s semi-liquid strategy focuses on secondaries and co-investments in the vehicle’s first two or three years.
“After that initial period, we will be adding more primary investments into the portfolio. These have higher return potential over the longer-term, and also make distributions,” he added.
The semi-liquid fund the firm currently runs allow quarterly redemptions of up to 5% of the vehicle’s net asset value (NAV).
“This is also a question for fund managers. Would they be willing to structure a fund in the private space where they know that liquidity is not a given and at the same time commit to offering redemption windows,” the industry specialist said.
“They have to have a pretty strong comfort in knowing that they could cash out partially or completely,” he added.
However, the funds do fulfil a function, particularly in today's financial environment, stressed other speakers.
As the macro economy is expected to “remain gloomy in the near future”, private equity funds that provide liquidity could come in handy for investors who need more safeguards for their portfolio, said Barry Tong, partner at Grant Thornton Advisory Services.
The funds could also act as a risk diversifier.
“The [semi-liquid] strategy is likely to appeal to intermediaries with a liquidity need and private clients that can’t (or won’t) accept the long lock-up periods you see in private equity funds,” said Wunderlin.
“In addition, it could work well for institutions – especially smaller institutions – that have liquidity constraints in their investment guidelines,” he added.