Two of the UK’s largest wealth management firms are avoiding new ‘semi-liquid’ vehicles as a way to access private markets, but Evelyn Partners and Quilter Cheviot also want to see the alternatives investment trust sector re-envigorated. 

Despite the marketing push in the industry surrounding long-term assets funds (LTAFs), there appears to have been muted interest from professional fund buyers.

‘We’ve had a lot of dialogue with LTAFs and semi-liquid fund structures – the problem is limited liquidity,’ James Burns, a managing partner at Evelyn, told Citywire. ‘They’re not relevant to most of our clients. They want peace of mind that they can get out.’ 

Burns (pictured above) added that he could only see semi-liquid fund structures being appropriate for investors with multi-million-pound portfolios – which is outside of Evelyn’s typical client base. 

‘We have no semi-liquid funds being used in our universe, and that won’t change this year,’ he said. 

UK regulators approved the first LTAF in 2023. Such funds aim to bridge the gap between full-blown private equity-style structures, which can see investors’ money committed for a decade or more, and daily-dealing funds which have been shown to be woefully inadequate for unlisted and hard-to-trade assets.

The ‘semi-liquid’ portfolios might permit investors to redeem some of their holding once a quarter or every six months, for example. 

Long-term, the rapidly-expanding private markets industry would probably like to sell LTAFs to retail investors too. However, while some pension providers have invested – such as government-sponsored Nest – so far most top wealth management firms have been unwilling or unable to use LTAFs for their clients.

Matt Ennion, head of investment fund research at Quilter Cheviot, echoed a similar sentimentto Burns and said his firm was not investing in any semi-liquid funds yet.

‘A lot of UK private wealth firms are looking, but no one is taking the dive yet,’ Ennion said. ‘It’s early days for us, but we’re searching for ways to expand our client base, and we’re certainly aware of LTAFs.’ 

Are LTAFs putting even more pressure on trusts? 

Although both firms are currently shunning the new evergreen fund structure, Evelyn and Quilter Cheviot do have an appetite for private assets. They are among the top shareholders of several private equity (PE) trusts. 

For example, Evelyn has large stakes in HarbourVest Global Private Equity (HPVE ), ICG Enterprise Trust (ICGT ), and NB Private Equity Partners (NBPE ). Quilter is also a top investor in HPVE and NBPE, as well as Pantheon International (PIN ). 

However, large and persistent discounts to net asset value (NAV) on trusts in the sector have frustrated investors. Excluding 3i Group, which sits at a unique and hefty premium, PE trusts are trading at an average 31% discount according to data from the Association of Investment Companies (AIC). 

That will have prompted questions over whether semi-liquid funds, which aren’t susceptible to daily dealing, are a better option for access to private markets. 

Solomon Nevins, who recently wrote a paper comparing semi-liquid funds and trusts for The Fund Review highlighted a number of reasons for the steep trust discounts. These include a higher interest rate environment, governance issues, and competition from new products.

‘As soon as rates went up, the performance of private market trusts tanked. They’ve been in the doldrums for years, and there’s been a bit of soul searching in the whole sector,’ Nevins told Citywire. ‘Evergreen funds blooming [has] come at a tricky time.’ 

Quilter’s Ennion suggested that LTAFs weren’t necessarily a more attractive alternative method of gaining private markets exposure, as there were relatively few options available in the UK. 

According to the FCA register, 23 LTAFs have been approved so far. However, the majority of these won’t be usable by wealth firms in their current form. 

‘Out of the LTAFs we could use, six are multi-strategy, and only three are pure play, so choices are limited,’ Ennion said. 

But he suggested it would only be a matter of time before typical PE trust buyers defected to new options.

‘[PE trusts] have a window of 12-18 months to improve,’ Ennion said. ‘Core shareholders are now looking at LTAFs, and trusts have to put up a fight. In 12-18 months there will be significantly more LTAFs, and there will be very good managers available.’ 

Evelyn’s Burns agreed that LTAFs ‘do put pressure on trusts’, primarily because they avoid the trusts’ severe price volatility. One advantage of semi-liquid funds is that they have monthly NAV valuations, rather than being prone to daily stock market swings that impact listed PE peers. 

However, looking at NAV performance alone, results have also been disappointing for investment companies. Research from The Fund Review highlighted that trusts underperformed semi-liquid funds (based in both the UK and Europe) during 2024. 

Nevins added that some of the semi-liquid options had access to better deal flow, especially if they were run by mega-firms such as Carlyle or Goldman Sachs. He suggested that equivalent trusts had more of a skew toward smaller, boutique managers.

But some of that more impressive performance for semi-liquid funds has been generated via the use of secondaries. Many of these funds have been buying assets at a discount, and marking up that discount as a gain in their own portfolios, therefore creating some distortion.

Lobbying for trust buybacks 

Despite trusts having the ability to be traded at any time, Quilter’s Ennion highlighted that liquidity was poor in the market and that potential cuts to interest rates are no guarantee that discounts will narrow significantly.

‘Discounts should come in, but the market has been locked for two years,’ he said. ‘There’s been no liquidity and no deals. There’s been a general lack of appetite for PE trusts, and no narrowing of the bid/offer spread. The transaction market has completely dried up.’

Ennion (pictured above) added that he would like to see similar strategies in the space merge together, but he believes this is an unlikely outcome. 

Evelyn has been encouraging PE trusts to embark on a policy of share buybacks. Burns said that the wealth firm had engaged with three trust boards in December alone. 

‘There needs to be an increase in buybacks,’ he said. ‘There’s an argument against that from the fund groups, as they say they want to re-invest the capital. But you tend to get a 30% uplift from valuation on exit. If 50% of that goes back to shareholders, you’re still getting a good return.

‘Harbourvest and Pantheon have said they will realise a certain amount via buybacks. We’re saying they need to do more.’ 

Burns added that the sector ‘needs to shrink before it grows’ and that there was a risk that activist investors could get involved. 

That may be happening already. In November, Metage Capital demanded HPVE introduce quarterly tenders or wind up its then £3.4bn portfolio. 

In an open letter, Metage said investors should be offered equivalent liquidity terms to its £1bn semi-liquid vehicle, HarbourVest Diversified Private Equity. 

The current of activism is also growing stronger in the wider investment companies universe, with US-based hedge fund Saba launching a dramatic attack against seven equity trusts in recent weeks. 

Similar assets under the hood?

There is certainly a bit of crossover between alternatives trusts and semi-liquid funds, which may lend weight to Metage’s arguments. 

The Fund Review highlighted that there were six trusts with similar evergreen options now available. 

Nevins noted that although the strategies may be similar, the underlying assets differ significantly due to variations in capital deployment timing and deal selection.

‘There is a concern that demand for the listed closed-end funds may be cannibalised by their semi-liquid sister funds, potentially leading to a structurally lower share price rating,’ he said.

‘These asset managers face the challenge of articulating how these two fund structures can coexist and even complement each other.’