The Growth and Appeal of "Semi-liquid" Funds

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One of the trends in financial innovation over the past decade has been interval and tender-offer funds. While first allowed as investment products over 25 years ago, they have risen in popularity to provide greater access to illiquid, long-term investments that were previously limited to private funds. A wider opportunity set of investors and historical alpha generation has attracted asset allocators and strategy providers and positioned interval funds and tender funds as a key solution.

Raising capital has always been a critical activity for the growth of a thriving business. Apart from raising a small portion of capital from friends and family and relying on excruciatingly expensive bank loans, businesses used to dream and plan for an IPO and raising debt from a public exchange. However, over the past decades, the growth of private capital has opened new sources of financing. Private market AUM grew to almost $10 trillion dollars as of H1 2021.1 More than $1 trillion in institutional private capital has been raised per year globally across all asset classes.2

The reason for this phenomenon is simple: Public companies represent a small and shrinking part of the universe of successful enterprises and historical returns have been inferior to private offerings. There were 7,810 public companies at the beginning of 2000 in the U.S., and that number shrank to around 4,800 by the end of 2022. Investable private companies have continued to grow. In the U.S., there were only 2,600 public companies with annual revenues of more than $100 million in 2021, compared to around 17,000 private corporations of that revenue magnitude.3

The appeal of private markets is not just the sheer size of the opportunity, but the fact that institutional funds have consistently delivered alpha over the years across all asset classes. The Cambridge Associates LLC US Private Equity Index, which compiles returns from over 1400 PE funds formed since 1986, shows a net alpha generation to limited partners of more than of 470 basis points over both 20- and 25-year horizons relative to both the Russell 2000 and the Russell 3000 indices under a modified public-market-equivalent calculation.4 What is even more alluring is the consistency of outperformance. Private equity and private credit have outperformed global public markets equivalents in 21 of the last 22 years.