Private Markets: Where Illiquidity Meets Liquidity?

The Liquidity Challenge in Private Markets 

Private markets have long been associated with illiquidity. Traditionally, investors accepted the trade-off: superior returns in exchange for capital lock-up over several years. However, the landscape is shifting. The rise of semi-liquid funds and liquidity mechanisms is redefining the risk equation, offering more flexible access to private assets while keeping their long-term investment appeal.
This evolution is not just a technical adjustment: it is a fundamental reshaping of how investors approach private markets. Nowadays, the demand for liquidity is no longer confined to public markets. Private assets, historically reserved for institutional investors or family offices, are now adapting to a world where investors expect flexibility, transparency and accessibility. This shift has deep implications, especially as the industry moves towards a greater participation of retail investors.

The Retailisation of Private Markets: A Strategic Imperative

The push towards retail access is not a passing trend: it is an irreversible structural shift. Regulatory changes, technological advancements and investor appetite are converging to make private assets accessible to a wider range of investors. The introduction of European Long-Term Investment Funds (ELTIF 2.0), the expansion of interval funds and the growing role of fintech platforms are clear indicators of this transformation.

Yet, the real question is not whether private markets will become more retail-friendly, it is whether the industry is ready to embrace this shift strategically. In our view:

• Investor education is key: retail investors need to understand the liquidity constraints and risk-return profile of private markets. Asset managers, along with distribution partners, must take responsibility for this educational effort to avoid unrealistic expectations,

• Technology is a true enabler: digital platforms, AI-driven investor profiling and blockchain-based settlements will play a crucial role in making private markets more accessible without compromising risk management,

• Regulatory frameworks are a game changer: regulators are opening pathways for retail participation, enabling a better access to private markets. Nevertheless overly stringent regulations could slow innovation, while excessive flexibility could lead to misselling

Investors, especially retail ones, must remain cautious in their search for high returns within private markets: even if technology and regulation enable better access to private assets funds, underlying assets remain illiquid and cannot totally dismiss the inherent liquidity risk.

Semi-Liquid Funds and Liquidity Mechanisms: An Imperfect Solution?

Semi-liquid funds are emerging as a key innovation in bridging the gap between private markets’ structural illiquidity and investors’ need for periodic access to capital. These funds, structured as open-ended vehicles with periodic redemption windows, provide a middle ground between traditional closed-ended private equity funds and fully liquid mutual funds.
Mechanically, they generally incorporate features such as:

• Limited redemption windows (e.g., quarterly or semi-annual) to balance investor withdrawals with asset liquidity,

• Gating mechanisms to prevent forced asset sales in distressed conditions along other liquidity management tools (swing pricing, anti-dilution levies or event redemptions in kind…),

• Hybrid structures that blend liquid securities (such as listed equities or credit) with illiquid private assets to create a more flexible investment model.

While ELTIF 2.0 encompasses a matching mechanism to provide more liquidity to investors, the development of secondary markets should also further enhance liquidity. As the infrastructure and transparency of secondary transaction platforms are still developing and evolving, they might become an essential complement to semi-liquid structures.

More Liquid, but still Illiquid

The introduction of ELTIF 2.0 marks a significant milestone in the evolution of private markets, particularly in enhancing liquidity and accessibility for retail investors. Over the past two years, ELTIF 2.0 has seen “good traction”, with a number of registered funds surpassing the total number of funds launched during the seven-year lifespan of its predecessor. This rapid growth underscores the potential of ELTIF 2.0 to democratise private market investments.

However, this success also raises important concerns, particularly for retail investors. While ELTIF 2.0 offers more flexible investment options and improved liquidity mechanisms, it may create an illusion of liquidity that could mislead retail investors. Private markets inherently involve illiquid assets, and the promise of easy access to liquidity can be deceptive. Retail investors, who typically have shorter investment horizons and higher liquidity needs, may find themselves exposed to unexpected risks if they underestimate the true nature of these investments.

As the private markets continue to open up to retail investors, it is crucial that they are adequately informed about the potential risks and limitations of liquidity in these markets. Regulatory bodies, asset managers and financial advisors must ensure that retail investors understand the complexities of private market investments and the mechanisms used to manage liquidity, especially the heaviest ones (such as reimbursement in kind). By striking a healthy balance between accessibility and risk awareness, private markets can continue to grow while protecting the interests of all investors involved.

To conclude, private assets funds, made more easily accessible and liquid, will certainly be a very strong lever for growth in the fundraising of alternative asset managers. Although institutional investors are well aware of the liquidity tools characteristics and their implications, the whole industry must nevertheless ensure that retail investors do not get the impression that private markets are liquid.

Pierre Monteillard, Co-Founder, Frame
Armand Affortit, Senior Manager, Frame