Morgan Stanley IM: The Quiet Revolution in Private Markets

Discover, in our latest insight, how semi-liquid funds are broadening access to private markets, while offering unique advantages designed to meet the needs of wealth managers and intermediaries.

02.12.2024 | 06:31 Uhr

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Key Points

Innovative fund structures in private markets have opened the once closed door to alternatives investing to the intermediary and wealth management channels.
These structures, known as semi-liquid funds, offer a number of key advantages for wealth investors with features designed to meet their unique liquidity, risk and performance needs.
In our view, private credit is an asset class that exhibits essential liquidity, diversification and valuation features that are well suited to a semi-liquid fund structure.

Democratizing access to alternatives
A recent report projects that alternatives AUM will rise to $29.2 trillion by 2029, up 74% from 2016.¹ As alternative asset investing continues to see robust growth, the investor base is inevitably broadening out as fund providers innovate to meet a more diversified set of investor needs.

In particular, the wealth management segment is fast emerging as a key private markets growth area. McKinsey projects that private markets allocations will comprise 3-5% of U.S. wealth management assets by 2025 from 2% in 2020, a rise of $500 billion to $1.3 trillion in assets.² Investor requests for increased liquidity and accessibility has been a an increasingly important feature of the alternatives’ quiet but steady take-off in the wealth channel.

Asset managers are responding to these needs by developing new fund structures and adjusting strategies to help address their varied requirements. In short, they are “democratizing” access by taking a range of private markets asset classes that have historically been the preserve of institutional investors and making them available to a wider investor audience.

Often called semi-liquid funds, these innovative structures offer several advantages for professional and non-professional investors catered to in the wealth management channel.

There are also important liquidity and performance considerations to which investors should remain aware. In this paper, we walk through the main features of semi-liquid funds. We then highlight semi-liquid funds’ suitability for private credit, an increasingly in-demand private markets sector.

Investing on an ongoing basis
Traditional private market funds, known as drawdown or close ended funds, typically have a pre-defined marketing period after which the investment manager (“General Partner” or “GP”) gradually calls down investor (“Limited Partner” or “LP”) capital subscriptions, typically over four to six years. In contrast, semi-liquid funds are open ended and provide ongoing access, allowing asset owners to remain invested for as long as they choose. From the investor perspective, this is often seen as the democratization of alternatives, placing them closer to traditional investments in how they are transacted. To attract investors into these new structures, investment minimums have also been lowered by some regulators through the introduction of new types of investment vehicles.

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