CONTRIBUTORS
Jake Williams
Global Co-Head of Alternatives
Wealth Management Product
Arthur Thomson
Global Alternatives Product Strategy Specialist
At Franklin Templeton, we are committed to providing investors with timely insights and industry perspectives on private markets. As the industry evolves rapidly, this series brings clarity to the key trends shaping its future”
George Stephan
COO - Global Wealth Management Alternatives
As the adoption of evergreen private market funds continues at speed, alongside the emergence of an increasing number of new entrants, investors should place focus on liquidity management and how managers are able to return capital to investors when required. Investors and their advisors know that they are gaining exposure to illiquid asset classes, which have a long investment horizon, but an evergreen structure is built around having a level of perceived certainty for accessing capital.
Providing liquidity to investors while investing in private markets requires careful product design and portfolio management due to the potential tension between an investor’s liquidity expectations and a manager’s ability to sell or exit underlying assets to provide the required cash (a liquidity mismatch).
In this paper, we focus on the construct of the “liquidity sleeve” or “liquidity bucket” within evergreen funds, how design matters, and some of the key considerations.
In evergreen vehicles, fund managers look to include terms in fund documents that set out clear guidance on:
- how investors can access their capital.
- the frequency at which they can do so.
- the amount they can access.
These terms typically include an initial soft lock of 1–2 years (where redemptions during this period are subject to a charge), monthly subscriptions and periodic redemptions with a percentage limit. These mechanisms allow for the manager to build and maintain a consistent, diversified private asset exposure which provides two potential benefits.
Investor confidence hinges on managers’ ability to effectively navigate liquidity challenges and be consistent throughout market cycles. In our opinion, the liquidity sleeve is a crucial component of this endeavor, and its design and management warrant careful consideration for investors and their advisors. By dynamically adjusting the sleeve composition in response to market conditions and fund structure, managers can strike a vital balance between accessibility and performance—a nuance that is increasingly important in the evolving private market landscape.
What are the risks?
All investments involve risks, including possible loss of principal.
Investment strategies involving Private Markets (such as Private Credit, Private Equity and Real Estate) are complex and speculative, entail significant risk and should not be considered a complete investment program. Such investments viewed as illiquid and may require a long-term commitment with no certainty of return. Depending on the product invested in, such investments and strategies may provide for only limited liquidity and are suitable only for persons who can afford to lose the entire amount of their investment. Private investments present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor's ability to dispose of them at a favorable time or price.
WF: 7565109