Investors are witnessing the rising popularity of private markets in recent years. That has been most obvious through the increasing allocation by large institutional investors into private market assets.

Much of the private market landscape had been out-of-bounds to individual investors given high hurdles to entry such as large ticket sizes and closed-ended fund structures. With the nascent shift towards open-ended vehicles, individual investors can better tap into exciting opportunities at their own convenience.

What are open-ended funds? Open-ended funds, also known as semi-liquid or evergreen funds, are long-term investment vehicles with no fixed end date, allowing continuous capital raising, reinvestment of returns, and flexible investment and redemption options for both managers and investors.

Here are five key benefits of open-ended funds when investing in private markets.

1. Lower investment minimums

For the everyday investor, even if you qualify for private investment products, one of the biggest hurdles to getting exposure to private assets is the high minimum investment amount.

This can range from the hundreds of thousands to low single digit millions. That’s not exactly what most of us would call “accessible”.

With an open-ended fund, subscriptions can be measured in the thousands of dollars.

This opens up a whole new asset class of investing for individuals that were previously locked out of the opportunities due to the high barrier to entry.

2. No fixed end date for funds

There is typically an end date to a traditional fund’s life.  That typically means that investors only will get their capital back (including any excess returns) within a set timeframe – typically 10-15 years.

With the introduction of open-ended funds, there are no fixed end dates which are a plus for individual investors, who can for themselves when to enter and exit an investment on a periodic basis rather than assigned pre-defined timelines.

Also, the problem with traditional funds is that they have a pre-set amount of time to create value for investors.

While a decade may seem like a long stretch of time, it can also mean having to exit investments that are performing well when the timeframe is up.

An open-ended fund structure, which has no set time limit for the investment horizon, can allow investment managers to take a longer-term view. It gives management teams the leeway to be patient and generate the optimal returns for their clients over time.

3. Enhanced liquidity

A bone of contention for investors putting their capital into private market assets is that liquidity is constrained. This might not be applicable to all private assets but it is the reality for many.

In other words, many investors lock up their money for at least 10 years when they commit their funds to private markets.

Liquidity is desirable in investments as it allows investors to sell their investments easily at a favourable price when there is a sudden need for cash. Being able to liquidate an investment easily when a cash need arises is a key consideration.

In that sense, illiquidity is one of the main obstacles that hold back private markets from appealing to a more diverse investor base.

The open-ended structure seeks to address this shortcoming by allowing investors to easily redeem their investment – as often as quarterly or even monthly.

4. Get investing (and compounding) right away

When we talk about compounding when investing, that age-old saying of “time in the markets, not timing the markets” holds true.

Yet the issue with traditional private market fund structure is that you have an up-front commitment but that investment is “called” over multiple years by the manager.

The upshot? It means investors aren’t getting exposure to private markets straight away. With the open-ended fund structure, your entire commitment gets called upfront.

That allows investors to obtain immediate exposure to the asset class by having their funds be fully deployed from the get-go. Additionally, it means that the compounding process – in private markets – will work in investors’ favour.

5. The future model of private market investing

Just as with any improvement in how markets function, open-ended funds are set to be the next frontier of private market investing.

Indeed, given the explosive growth of open-ended funds (see Fig. 1), it’s not hard to see how this model could dominate the private markets space in a similar fashion to how ETFs have conquered public markets.

The open-ended fund model is really serving private markets in a way that isn’t dissimilar to ETFs – providing more efficiency, liquidity and ease of access.

Meanwhile, the legacy closed-ended fund model could be going the way of the traditional mutual fund; still relevant but out of touch with the needs of modern investors in fast-evolving markets.

Bringing private markets to a wider audience

Open-ended funds are certainly not going anywhere. They’re a product of the demands of modern investors, from institutions to everyday retail investors that want exposure to the unique opportunities that exist within private markets.

Being able to be nimble with how much you want to allocate while still getting that exposure to private market compounding is an attractive proposition.

For investors of all stripes, open-ended funds are set to deliver a more efficient private markets experience now and in the future.

Key risks investing in alternatives

While investing in alternatives may enhance your portfolio, it also comes with higher levels of risk due to a number of factors, including but not limited to:

Capital Risk: Alternative investments are subject to economic, regulatory, market, and political risks, potentially making them worth more or less than the original investment. Investors may lose the entirety of their invested capital.
Liquidity and Valuation Risk: Alternative investments may have no or limited liquidity with valuations that may be based on estimates which cannot be marked to market until sale. There is no guarantee of selling these investments at fair value.

To learn more about how you can access private markets and alternative investments, open an account with us and explore the diverse opportunities we offer to enhance your portfolio.

Sources

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