Semi Liquid and Evergreen Funds

Semi liquid funds have become a bit of a thing in the past few years. They serve a purpose.

1. They offer a liquid form of accessing an illiquid asset class.
2. They reduce cash drag as they are usually already partially or substantially deployed.
3. They typically feature lower minimum investment amounts.
4. Continuous compounding. Without and end date, they don’t return capital and so continuously compound returns.
5. Operational simplicity. They offer investors who can’t manage a private markets investment program a convenient means to invest without managing commitments, capital calls, and redepployment.

There are some drawbacks:

1. The liquidity they offer is conditional and somewhat forced. Funds usually feature a ‘gate’. They will only satisfy redemptions up to a limited percentage of total assets at a time.
2. Valuations are not well defined and face a lag.
3. Performance drag from liquid assets held to manage liquidity.

There are more serious complications and risks:

1. The investment manager should always acquire and manage assets firstly with the exit in mind. The perpetual structure does not incentivise this.
2. The liquidity is not useful. If the fund faces significant redemptions, it will have to gate, that is, limit redemptions. When a gate is imposed, it incentivises all investors to redeem.
3. In an LP has troubled investments elsewhere, they may likely seek to redeem from semi liquid funds. This could trigger gating. There is therefore contagion risk.

Semi liquid funds have grown in AUM from circa US$120 billion in 2020 to over US$600 billion in 2025. There is an interesting dynamic at the heart of this phenomenon. Before 2022, LPs reinvested fund distributions in subsequent funds allowing GPs to purchase more new businesses in a positive feedback cycle. As interest rates surged in 2022, M&A froze and exits fell 60% from their 2021 peak. LPs weren’t getting cash back and therefore reduced their commitments to follow on funds. Institutional LPs capacity to allocate became seriously impaired. For GPs, a new source of capital had to be found: private wealth investors. These investors, however, differ from insitutional LPs in that they require liquidity or the illusion thereof. Enter the semi liquid, perpetual fund.

To invest in semi liquid funds, the investor has to avoid being too precise about the entry and exit valuations at the redemption dates. The investor has to accept that often liquidity is being provided by new investors buying into the fund. There is a technical term for this type of scheme, beginning with the letter ‘P’. Investors must have a short memory not extending before 2008 when an entire cohort of liquid funds were found to have hoarded up private credit (they are not that new after all), or private equity, and had to gate or suspend redemptions (thus a semi solid fund?).