What to watch in 2023: The liquidity of semi-liquid private-market assets

Semi-liquid private-market investment vehicles, popularly known as evergreen vehicles, have developed into a rapidly growing asset class. But they recently became a victim of their own success when some of them became no longer able to service all of investors’ redemption requests. This shows once again that there is no free lunch on the financial markets.


An ingenious construct – but only in theory?

Semi-liquid private-market investment vehicles have enjoyed growing popularity in recent years. On paper, these open-ended investment vehicles (hence the moniker “evergreen”) promise a win-win situation. They enable private-market managers to exploit a new sales channel, and they give retail investors access to the world of private equity, private credit, and private real estate and infrastructure markets – access that used to be reserved almost exclusively for institutional investors. Moreover, they make an asset class that normally requires an investment term of five years (and sometimes much longer) and which is thus highly illiquid tradeable. Semi-liquid products offer monthly or at least quarterly liquidity. These constructs are nothing new per se. They’ve proven themselves in practice for years, and some have more than a ten-year track record. However, semi-liquid investment vehicles invariably make headlines when the liquidity mechanism that works in theory gets put to the test, which usually happens during times of elevated volatility and falling stock prices on equity markets. Most recently, various private real estate funds in the USA such as Blackstone’s BREIT, Starwood’s SREIT or KKR’s KREST were hit.

Performance gap spurs selling pressure

The aforementioned investment vehicles had to introduce “gating” to restrict the redemption of fund units because withdrawal requests exceeded the set limit (a quarterly maximum of 5%, for example, in the case of Blackstone’s BREIT). It’s entirely understandable that (too) many investors suddenly wanted to head for the exit all at the same time. After posting massive value appreciation upward of 30% in 2021, the Blackstone fund, for instance, gained another 9% in 2022 through end-September. Meanwhile, almost every asset class, including exchange-listed real estate investment trusts (REITs), registered massive price drawdowns over the first three quarters of 2022. Faced with this situation, it was tempting for many investors to take profits on semi-liquid products in order to stanch losses elsewhere or even simply to take advantage of the more attractive valuations today on liquid markets. Because precisely during turbulent market periods, valuations and valuation philosophies on public and private markets (and between public- and private-market managers) drift apart, and criticism of private markets grows louder. That’s because while liquid equity markets often overreact in downward scenarios, private-market managers frequently are slow (and reluctant?) to adjust the valuations of their investment assets to the new fundamentals data.


Performance and valuation gap | Where does the fault lie?

Dow Jones Select REIT index and NCREIF private real estate index

Sources: Bloomberg, Kaiser Partner Privatbank


No free lunch

So, are evergreen vehicles a faulty construct? Not necessarily. The redemption limits for semi-liquid funds are necessary and ultimately serve to protect investors in them. They ensure that fund managers are not forced to sell assets in a panic and probably at bad prices just to honor share redemptions. Furthermore, evergreen vehicles are superior to the many exchange-listed investment trusts on the London Stock Exchange, for instance, that likewise invest in private-market assets. Those investment trusts often lack liquidity, which largely makes it impossible to execute large-scale transactions without affecting the market price. Moreover, during periods of stress, they usually trade at big discounts to their “intrinsic value” and thus are at least as volatile as conventional equity investments. The evergreen structure therefore has advantages: it enables access to illiquid assets without requiring a years-long commitment and smooths performance across the entire economic and investment cycle. However, these attractive features don’t come for free: during phases of elevated volatility – precisely when investors often seek liquidity – liquidity can dry up. Moreover, during market recovery phases, semi-liquid instruments can turn out to be comparative “lame ducks” due to the inertia of the underlying valuation approaches. This shows once more that there is no free lunch on the financial markets. Having your cake and eating it too doesn’t work here, not even in the case of evergreen private-market funds.


Conclusion: Semi-liquid private-market investment vehicles fulfill their purpose and give retail investors uncomplicated access to private assets. When it comes to liquidity, though, their accent is on “semi”. Investors therefore should pursue a long-term investment horizon with these instruments and should refrain from trying to time the market. The universe of evergreen vehicles looks set to expand further in 2023, and many providers are in the starting blocks. At the moment, however, it’s worth taking a look again at exchange-traded investment instruments at least in the real estate sector. They currently are much more attractively valued relative to semi-liquid products and have longer-term outperformance potential.


Oliver Hackel, CFA Senior Investment Strategist

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