MEDIA RELEASE: The proliferation of open-ended funds for illiquid assets has increased the attractiveness of private assets for many investors, and despite concerns around the cost of this increased liquidity, research shows the cumulative returns over a longer period may exceed those from closed-ended funds, according to Schroders Australia head of private assets sales, Claire Smith.

Smith says private equity has proven its place in a portfolio having historically delivered higher returns at a lower volatility.

“In the current economic environment, investors are looking for asset classes to provide diversification from traditional listed equities and bonds, particularly at present due to the increasing correlation between these two asset classes.”

“Historically, asset classes like private equity have remained out of reach to the general investor, with investment vehicles traditionally requiring high minimum investment amounts and decade-long commitments.”

In recent times, Smith says she has seen the democratisation of private assets, with fund managers creating a suite of open-ended, semi-liquid funds that allow investors to access this asset class with a much lower commitment and more palatable liquidity profile.

“Generally these funds have a quarterly redemption cycle. This may still be deemed too illiquid for certain investors, however there are many that find this trade-off of liquidity for access to differentiated asset types very attractive.”

Smith says individual investors and smaller institutions have been quick to embrace open-ended, semi-liquid funds for private equity as they overcome many of the access constraints and complexity of closed-ended funds.

“Many semi-liquid, open-ended funds are structured such that when an investor subscribes to the fund, 100 per cent of the investment amount is invested into the fund at the next trading date, giving immediate access to an existing portfolio of companies.”

“When investments within an open-ended fund are exited, the money is typically either made available to investors wishing to redeem, or if there is more capital than redemption requests, the proceeds will be re-invested into new opportunities. This means investors stay continually invested and exposed to a continuously refreshed portfolio of companies.”

Smith says, for greater liquidity reasons, the manager will hold some of the capital in cash – generally in the range of 10-20 per cent – to provide a runway of cash for investors that do wish to redeem.

“While some investors are concerned that this level of cash holdings will negatively influence returns, this may not be the case.”

To address the question of whether the saving in time and administration for semi-liquid funds outweighs the potential reduction in returns, Schroders Capital modelled investment returns from private assets under four different fund structures select scenarios:

• Semi-liquid
• Closed-end, liquidity in cash
• Closed-end, liquidity in 5yr Treasuries
• Closed-end, liquidity in MSCI World

“Our modelling shows that the highest cumulative returns come from an investment in the open-ended fund structure followed by the closed-end fund with liquidity held in MSCI World,” Smith says.

“The lowest returns from our model came from a closed-end fund investment with the liquidity held in cash or five year Treasuries.”

Smith says the results are not surprising.

“The manager is constantly managing the investment deal pipeline of the fund to match the liquidity level of the fund. If the cash levels start to increase through new investor subscriptions or monies received from investment exits, the manager may increase the deal pipeline. If liquidity levels reduce because investors redeem or there are fewer exits, the manager may slow down or stop the investment pace,” she says.