Private credit ‘best suited to semi-liquid structure’

Private assets are ‘inherently illiquid’ and the liquidity risk ‘can’t be eliminated entirely’, according to a new study – but private credit is ‘the asset class best suited to the semi-liquid structure’.

A study conducted by The Fund Review looked at the liquidity within semi-liquid funds and considered how liquidity risk can be reduced through a careful fund selection and implementation approach.

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It found that investors can reduce their risk through their allocation approach to semi-liquid funds, for example, having smaller fund ownerships and diversifying across multiple funds.

However, it concluded that criticisms that semi-liquid funds are in fact binary-liquid funds, that either will or won’t have liquidity, ‘holds some truth’.

‘Investors can mitigate liquidity risk through the choice of asset class, fund selection, and position sizing but the risk can’t be eliminated entirely: private assets are inherently illiquid,’ the independent research firm said in its report.

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However, it noted that this risk carries an attractive return premium and is a risk that most long-term investors can accept and manage, adding that private credit is ‘best suited’ to the semi-liquid structure.

‘Private credit is the asset class best suited to the semi-liquid structure with good prospects of being able to meet redemption policies over multiple years, even in the face of stressed market conditions,’ it concluded.

‘Managers that take steps to maintain accurate valuations, provide clear portfolio liquidity metrics and have dealing terms the penalise short-term trading can further reduce liquidity risk by deterring large-scale redemptions.’

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