Private markets continue to move further into the mainstream, with semiliquid or evergreen fund structures becoming a common entry point for investors. But new Morningstar research suggests these vehicles are often misunderstood and frequently mispositioned in portfolios.
In a new report, The Role of Semiliquid Funds in Portfolios, Morningstar examines how semiliquid vehicles actually behave once risk, liquidity constraints, and fees are fully accounted for, and why many of the diversification and return claims surrounding them deserve closer scrutiny.
Francesco Paganelli, Principal of Manager Researcher at Morningstar, commented: “Semiliquid funds promise easier access to private markets, but deploying them in a diversified portfolio presents its own challenges. Semiliquid funds aren’t magic diversifiers, and most should be seen as expanding the equity or credit opportunity set, rather than adding new risk factors. To genuinely reap their benefits, investors need patience, a return premium to compensate for their illiquidity and complexity, and skilled manager selection. Success depends on setting realistic expectations and sizing allocations carefully. Moreover, vehicle structure matters as much as choosing the right strategy. As private markets move further into the mainstream, a disciplined approach will be essential to avoiding unintended risks”
Key findings include:
Diversification assumptions may not hold up. Most semiliquid strategies carry traditional equity or credit risk and tend to behave more like public markets than advertised, lessening their diversification qualities.
Illiquidity premiums are uncertain. Giving up liquidity does not automatically translate into higher returns, especially after accounting for their layered fees and liquidity buffers.
Fund design matters. When a fund offers more liquidity than its holdings can support, stress can show up quickly in volatile markets. On top, their structure can make portfolio adjustments and rebalancing harder.
Morningstar outlines a four‑step approach to portfolio construction: setting realistic risk and return expectations, aligning fund structure with underlying assets and investor needs, sizing allocations conservatively, and evaluating semiliquid funds in the context of the total portfolio.
Manager selection is critical. Return dispersion in private markets is wide, making due diligence a key driver of outcomes.
Ultimately, Morningstar finds that investors need three things to benefit from semiliquid funds: patience and a long-term mindset, a return premium that compensates for complexity and illiquidity, and the ability to select the right managers.
The full report is available here.
