New bfinance report highlights key risks and opportunities in semi-liquid private equity

Frithjof VanZyp

A new semi-liquid private equity market report from independent global investment consultancy, bfinance, has found that the market for semi-liquid PE funds has grown to more than 40 strategies with an estimated US$30 billion in assets under management (AUM), many of which were launched since 2020. This demonstrates the traction semi-liquid structures have gained among institutional investors, wealth management firms, and retail investors.

The report found that liquidity risks remain a significant challenge for investors. Many semi-liquid vehicles cap redemptions at 5% of net redemptions per quarter and 20% per year, and several impose lock-up periods of up to five years. These constraints raise concerns about potential liquidity mismatches, particularly in market downturns when redemption requests may exceed inflows.

The report also highlights client composition. A fund’s stability relies heavily on its investor base, and a diverse mix of institutional and retail investors can help mitigate liquidity risks, as different investor groups may have varying redemption behaviours. However, some funds targeting retail investors, wealth managers, and private banking clients may be more susceptible to sudden withdrawals. The report suggests that a well-balanced investor base is essential to maintaining fund stability.

In addition, there are certain concerns around fee structures, with many funds charging management fees based on net asset value (NAV) from day one rather than committed capital, as seen in traditional closed-ended funds. The report found that 50% of semi-liquid funds charge performance fees on unrealised gains, raising questions about valuation methodologies and investor fairness.

Despite debates around returns versus closed-ended private equity funds, long-term performance data remains scarce. With few semi-liquid PE strategies having track records beyond five years, the report suggests that investors should carefully assess whether these vehicles align with their objectives.

Frithjof van Zyp, Senior Director, bfinance Australia, said: “Interest in ‘Semi-liquid’ vehicles for private markets strategies is growing among Australian asset owners, in particular across the wealth segment. bfinance’s research team has been closely monitoring the recent development of semi-liquid private equity vehicles, and in this report we explore five critical questions every asset owner should evaluate before making an allocation.”

Anna Morrison, Managing Director, Private Markets at bfinance, said: “We are seeing a strong appetite for semi-liquid strategies, driven by the promise of liquidity and diversification. However, investors must be aware that these structures introduce new risks, including fee structures and liquidity risks, particularly in times of market stress. Due diligence on liquidity mechanisms and investor composition is paramount.”