From Exclusive to Accessible: Private Investments for All?

Investors are contending with high valuations, market concentration, and volatility in public equities, prompting a search for strategies offering strong returns and diversification potential. Enter alternative and private investments—once exclusive to large institutions, now increasingly accessible to individuals and smaller entities. This shift opens exciting opportunities for those with heretofore limited access, but understanding the trade-offs is key to effectively integrating these strategies and managing risks.

Broadening the Audience

While private equity, private credit, real estate, and hedge funds can enhance long-term portfolio performance, many individual investors are just now gaining access. Such strategies—which involve varying degrees of complexity and illiquidity—were traditionally available through private partnerships, restricted to “sophisticated” investors who met strict regulatory criteria. To break down these barriers, asset managers have increasingly turned to vehicles like BDCs, REITs, interval funds, and tender offer funds, each with unique features when it comes to liquidity, fees, and asset types. Over the past several years, the launch of these vehicles has surged, putting them in front of a much wider audience (Display).

 

The key connection among these structures? They allow smaller investors to hold illiquid assets inside registered funds—a valuable innovation. Yet, it’s crucial to grasp their trade-offs and how they impact potential risks. Above all, fund structures shouldn’t introduce complications beyond those inherent to the strategies themselves.

The Alphabet Soup of Alternative Fund Structures

While these so-called “evergreen” vehicles have distinct traits that typically dictate the assets they’re best suited for, each essentially offers some combination of:

• the ability to hold a sizable allocation to illiquid assets,
• periodic redemptions, and
• an indefinite time horizon that allows investors to reinvest/remain invested.

Transparency and the distribution of cash to investors are also important factors, but liquidity remains paramount. These vehicles can give rise to an asset-liability mismatch that requires careful management.

 

Avoid the Liquidity Crunch

What’s driving the mismatch? Put simply, investors’ time horizons and the way the underlying assets trade. For instance, traditional stock and bond investors are used to buying and selling quickly and easily at predictable, intuitive prices. In contrast, private assets don’t trade regularly, making transactions infrequent and slow. This friction has traditionally confined private investments to private partnerships with multiyear commitments.

Below, we’ve mapped out the relative advantages and disadvantages of each structure:

	Public BDC or REIT	Private BDC or REIT	Interval or Tender Offer Funds
Pros	Most liquid (even intraday)	When well designed, can match liquidity between investors and underlying investments, offering potentially higher returns	Potential for regular liquidity
Cons	Security value can deviate meaningfully from underlying net asset value	Less liquid	Limits illiquid investments to prevent mismatch, impacting potential returns

Public BDCs or REITs are effectively public companies on public exchanges—with the associated pros and cons, though slightly different tax implications. Meanwhile, private BDCs or REITs are more like typical private funds, where investors sacrifice liquidity to access what managers deem the most attractive investments, holding them long enough for returns to materialize.

Recently, interval and tender offer funds have gained popularity for their attempt to strike a balance between the two. In other words, these funds aim to provide reasonable liquidity despite the underlying investments’ constraints. Yet, if too many investors redeem simultaneously, the fund may impose a combination of liquidity restrictions (e.g., “gates”), or sell assets under pressure. Investors who fail to recognize this potential liquidity imbalance could face unexpected unavailability of their funds and losses from forced liquidations.

How to avoid such pitfalls? Structures should align the liquidity of underlying investments with the liquidity offered to investors. This can be accomplished by either balancing liquid and illiquid investments within the strategy or by structuring the fund’s liquidity offerings to match the investment time horizon. For example, a strategy involving illiquid loans with a three-year term could restrict investor’s liquidity during the first three years, ensuring stability and reducing the risk of forced asset sales.

Is Growth Good for Investors?

As these kinds of vehicles proliferate, investors must be discerning when it comes to quality. After all, what’s beneficial for asset managers may not always be advantageous for end investors. And while not all offerings are questionable, some warrant healthy skepticism. That’s why, even before considering the vehicle, investors should first assess the investment manager’s track record. What’s more, keep in mind that the growing influx of capital into private markets will impact asset class performance, affecting both overall returns and those from specific managers.

Intelligently Incorporating Private Market Alternatives

Above all, when exploring such strategies, investors should focus on three key aspects:

1. First, ensure the investment offers a compelling risk-return benefit—given both the asset class and the manager’s capabilities. Performance has been shown to vary widely among private market managers.
2. Second, be prepared to handle the investment’s level of illiquidity, including possible gating scenarios.
3. Third, make sure the vehicle’s liquidity aligns with the underlying investments’ expected liquidity characteristics.

With proper consideration, private market alternatives can enhance many investors’ portfolios. The trade-offs in private investments are manageable. With thoughtful construction, incorporating alternatives can position investors for potentially stronger returns with lower portfolio volatility over time.