CONTRIBUTORS
Jake Williams
Global Co-Head,
Private Markets Product
Arthur Thomson
Principal,
Private Markets Product
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
Global COO, Wealth Management, Private Markets
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 provide the required cash from underlying assets while maintaining their investment philosophy (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.
Firstly, the ability for the underlying private assets to support liquidity mechanics as they naturally deliver capital when exits or realizations occur without the need for fire sales. Secondly, it allows for the manager to optimize exposure to private assets without needing to hold excessive levels of more liquid assets, which could present a drag on returns.
As highlighted in our recent paper, Not a simple open and closed case, effective management of an evergreen fund’s portfolio requires a structured approach to achieving its long-term investment objectives. To ensure that the necessary capital is available to meet both liquidity needs and future investment opportunities, managers can implement a hierarchical strategy. This multi-layered approach enables them to balance the fund’s short-term liquidity requirements with its long-term deployment goals, ultimately supporting the sustainability of the evergreen vehicle.
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.
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