Operational Considerations for Semi-Liquid Funds

The Growth of Semi-Liquid Funds in Private Markets

Private markets continue to evolve as semi-liquid fund structures, which blend elements of open-ended and closed-ended funds, become increasingly common across alternative investments.

Some managers with experience in traditional open-ended or closed-ended structures may lack the operational infrastructure or technology required to effectively support semi-liquid funds. As appetite for these funds expands, managers should ensure their products are appropriately designed for the investors they seek to attract, deliver the appropriate value proposition, and identify potential risks before investors make decisions.

In Carne’s Change 2026 report, 57% of respondents expected to launch semi-liquid funds within the next 18 months, with another 32% planning to offer semi-liquids within the next two years. Carne also reported that less than half (45%) of fund managers feel equipped to launch semi-liquid funds.

As adoption accelerates, operational scalability and liquidity management are becoming critical differentiators for asset managers entering the semi-liquid fund market.

Why Semi-Liquid Funds Require Customized Operating Models

To fill structural and operational gaps, managers are relying on attorneys to refine contractual language and terms, address investor eligibility and suitability considerations, and monitor regulations and rules governing new funds. Once the fund structures and terms are established, experienced outsourcing partners may provide services that include using existing public/private market platforms, tailoring solutions for discrete needs, and improving current systems and processes to support a fund’s requirements.

Frequently, attorneys and outsourcing partners use multi-level approaches when establishing and managing funds: determining a fund’s legal structure, establishing the way in which investors interact with funds (such as draw-downs, redemptions, commitments, subscriptions, and detailed reporting) and evaluating fund investments for liquidity.

Ultimately, the goal is to increase automation and streamline as many processes as possible, reduce costs, and transform tailored structures into repeatable, scalable products. For the time being, however, that goal is best described as a work in progress.

What is Driving Growth in Semi-Liquid Fund Structures?

Growth in semi-liquid funds has been driven in part by investor demand for greater liquidity and flexibility within private markets.

Retail and private wealth channels increasingly seek access to private market returns but demand greater liquidity and flexibility to rebalance portfolios as market conditions evolve.

Institutional investors, including pension funds and insurance companies that have historically dominated closed-ended funds, may seek greater flexibility rather than locking capital for seven to 10 years, as well as the ability to respond to new market opportunities without disrupting broader portfolio objectives. Institutional investors attempting to sell assets before the end of a closed-ended fund term often face losing 20% to 30% of an investment because they are extremely difficult to value.

The flexibility of evergreen funds may allow institutional and eligible retail investors to invest capital with the ability to redeem or withdraw funds at certain points, reinvest, or increase commitments to existing funds.

What Legal Challenges Exist in Semi-Liquid Funds?

The highly customized nature of semi-liquid funds creates significant challenges for attorneys charged with structuring new funds based on specific requirements from asset managers. Agreements must be carefully drawn from the outset as changes can require limited partner consent.

“We have advised our clients on the launch of a host of evergreen and hybrid funds recently, with each one having its own unique structure and characteristics,” said Ben Vickers, Managing Associate, Funds, Simmons & Simmons LLP. “There is no one product in the market that is suitable for all hybrid, semi-liquid funds.”

Established asset managers with extensive experience typically seek advice on how the attorneys address problems they’ve seen in the markets. “It’s very much about our clients’ commercial objectives, but we have seen many trends and helped clients develop solutions generally applicable across fund structures,” he stated.

For other firms with less experience, “it’s more of a brainstorming approach in designing the structure and terms to suit their objectives,” Vickers explained.

Among the most frequent issues reviewed are terms that “offer withdrawal rights to investors in an illiquid fund,” he noted. “We provide options based on our experience in the market having regard to the approaches followed by other top tier fund managers.”

Often the complexity unique in hybrid fund structures focuses on “constant fundraising, admitting new investors while at the same time drawing down commitments of investors on an as-needed basis over time, redeeming investors without necessarily disposing of the fund’s investments, managing existing investments and constantly looking for new investments to make,” Vickers said. “As a result, there is more fund term and structuring considerations upfront compared with a typical closed-ended fund, but once the fund is operational, sponsors are generally involved in less negotiation with investors during fundraising because investors tend to rely on their redemption rights as a means of protecting their interests.”

As the funds are structured, valuation becomes even more important compared with a closed-ended fund because investors usually participate in the fund based on investment value rather than cost, Vickers noted. “Accurate, fair valuation is important because it is the basis for admission, redemptions, management fees, and performance fees which, like a typical hedge fund, are often calculated over a period of time based on both actual realizations and unrealized gains,” he said. “Unlike a hedge fund, a readily available valuation is often not available, which poses an additional challenge for managers of evergreen and hybrid funds. Along with fund service providers, such as MUFG Investor Services, we have helped clients develop viable, market-tested solutions.”

How Do Managers Balance Investor Expectations and Liquidity?

Clearly defining “retail” investors is a distinction when establishing a fund. Traditional closed-ended funds may have 10 to 20 institutional investors, while semi-liquid funds could have hundreds or thousands, with larger investors having a wide range of individual requirements and side letters.

“It’s important to understand that when we say ‘retail’ investors, we’re typically discussing private banking and private investors,” said Oliver Zwick, a partner at Clifford Chance in Luxembourg. “Many wealthy (retail) clients don’t qualify as professional investors, and it is difficult to prepare investments for them. We encourage managers to restrict funds to ‘professional clients’ within that meaning.”

One of the key questions with non-institutional or retail investors becomes how they enter funds, and their understanding of potential risks. Funds may target retail money, but there can be issues if investors access an institutional product. “In some cases, retail investor funds will invest through aggregators, e.g. alongside other institutional products of the same fund manager,” Zwick said.

Complex global structures require experienced global legal teams that are familiar with a range of tools designed to protect funds, he explained. “We put in a lot of things that might not be obvious, but when there is trouble with a fund, you need them, he said. For example, “side pocket” accounts are used to segregate illiquid assets, when there is difficulty putting a price or value on the asset, from more liquid investments. When assets are moved to side pockets, only existing investors benefit from the asset’s returns. While side pockets are rarely used, they become very valuable when a fund’s assets are struggling, which is why attorneys sometimes recommend including them in agreements.

In fact, many liquidity tools that have been used in funds for decades (gating that limits the total amount of money that can be withdrawn from a fund, e.g., 5% to 10% of NAV, or deferred redemptions, among others) must be carefully considered in semi-liquid funds, especially those containing illiquid real estate or private market assets.

“The catch now is that in whatever product you’re setting up, managers need to be realistic about the liquidity they can offer,” Zwick noted. By establishing clear guardrails on when and how investors can redeem capital, especially in turbulent markets, liquidity management tools can help managers to reduce the risk of mass redemptions. “Without protection, you can collapse a fund,” he added. Balancing portfolios with liquid and illiquid assets is essential.

Next Steps to Address Operational Challenges

Why Do Semi-Liquid Funds Require Customized Service Models?

Before asset managers can focus on attracting investors, purchasing assets, and determining how to manage their daily operations, legal terms for semi-liquid funds need to be established. Some large private credit and real estate funds that have successfully accumulated assets have hired teams to coordinate investor servicing, while other have turned to outsourcing partners.

“Having the right service provider, having the right systems, and having the right partnership structure to facilitate all of that is critically important,” said Gavin Byrnes, Chairperson and Independent Non-Executive Director, MUFG Alternative Fund Services (Ireland) Limited. “Investor servicing is an enormous body of work. There are different types of asset classes, and the liquidity characteristics are different. You’ll have lots of inbound queries, and your service provider must be able to deal with that, to filter that, to be able to work with the manager very, very closely to provide the correct information to that investor. If you don’t give that any thought until after the fact, you will likely become a victim of your own success.”

While outsourcing partners may have teams and technology that support investor experiences, reduce costs, and manage risk, the scope of semi-liquid funds can pose operational complexities that must be addressed early.

“The unique nature of each fund, which may call for additional requirements and services, means we have to be absolutely clear about a fund’s structure,” Nangle explained. “It’s important to ask as many questions as early as possible and work closely with managers to ensure we understand the requirements, and potential market scenarios, to draft clear service level agreements. This way, we can service their needs throughout the fund lifecycle and avoid any scope drift.”

Outsourcing partners are continually addressing a range of nuances within fund structures. For example, deal allocation within funds is increasingly complex. An investor’s share of the investments in an overall fund may be dictated by the point at which the shares are drawn down. As a result, there may not be a single NAV per share as each investor has a different investment share, depending on when the investor began participating in a fund and the allocation rules detailed in fund documents. Add to that the fact that there can be thousands of investors, many with different time frames for entering and exiting a fund, and the accounting can resemble a multi-tiered chess board.

Similarly, when investors move toward semi-liquid funds, the increasing number of side letters (or terms unique to specific investors common in open- and closed-ended funds) can create additional complexity. These side letters determine fees (e.g., gross market base vs. gross percent net of all fees), pricing per unit and NAV per share, investor redemption, transfer and excusal rights, as well as enhanced reporting.

“Side letters can have a huge impact and semi-liquid funds are bringing those two worlds together,” Nangle explained. “Investors still want their side letters and want to negotiate their own terms. Institutional investors and high-net-worth individuals are not willing to give up negotiating terms to reduce performance and management fees, share capital, and obtain additional reporting. Automating and tracking terms in side letters is a key complication in evergreen structures.”

For example, Nangle recalled a side letter for an institutional investor with 25% of a fund that required repayment of capital in one bank account and income in another account, meaning that every payment was divided into separate accounts. In another letter, an institutional investor required that all reporting be converted into Japanese yen, which was not unusual for a closed-ended fund, but rare for a retail investor.

Developing launch strategies and implementing systems for asset managers require extensive preparation to meet the fund’s requirements and deliver efficient platforms and processes. Unsurprisingly, asset managers tend to prefer attorneys and operational partners who are working in the semi-liquid fund markets and understand how to identify and help address unique issues as they arise.

MUFG Investor Services has been developing solutions for semi-liquid funds since 2019 in jurisdictions including Luxembourg, Cayman, and Dublin, Nangle noted. In an industry where speed-to-market is crucial and there are no “one size fits all” solutions, seasoned outsourcing teams help asset managers entering the semi-liquid marketplace with guidance to select the proper tools and systems.

“Fund managers rely on administrators and service providers to know the practical implications of fund structures and documents down the line,” Nangle said. “We have to highlight potential issues in the early planning stages to reduce risk.”

For example, implementing “slow pay” processes, which structure the way in which investors can redeem capital, particularly in credit funds, may help asset managers avoid “fire sales” or a rush to sell assets at reduced value to pay investors.

If investors want to exit a fund early, slow pay provisions may allocate capital to individual deals rather than overall fund NAV, allow them to redeem any capital that hasn’t been drawn yet, or access a portion of liquid assets. Investors may be required to wait for the sale of long-term assets in the agreed timeline before receiving their share of those investments.

“Our experience helps us to work with asset managers on a wide range of topics,” Nangle said. “That includes managing limited partner agreements, domicile locations, waterfall and carried interest approaches, gating, establishing bank accounts, and providing automated payments and settlements for slow pay and full redemptions. We also provide reporting and fee calculation tools for determining management and performance fees to help managers coordinate funds after launch.”

Improving Efficiency in Semi-Liquid Funds

To help drive continued growth, asset managers and outsourcing partners must continue to take the lessons learned so far with semi-liquid funds to establish standards where appropriate. These may include common language, key definitions, and guardrails designed to help future-proof funds and simplify operations.

Early on, the definition of an evergreen fund may have focused on its gating and lock in periods. Fast forward to current times and the focus may now include the ability to close the fund or penalize an investor if redemption causes an early investment exit. The importance of applying industry learnings such as these and adopting the appropriate operational and other frameworks, or guardrails, cannot be overstated.

To be clear, developing a standard language and processes will not change the flexible nature of structures for semi-liquid funds. However, doing so can provide a foundation to improve scalability, support automation, enable more efficient launches, and reduce legal and operational risk while maintaining the necessary flexibility.

In some cases, asset managers are testing the waters by “launching smaller evergreen funds to see how quickly assets can grow, explore processes for attracting new investors, and determine how best to proceed with larger funds,” Nangle said.

Nangle noted that the growing popularity of evergreen funds dates to roughly 2019, making it difficult to determine how the industry will evolve at this point. “We may see opportunities for certain elements of evergreen funds to become more standard as we go, but we haven’t seen enough models to see if we’ll have standardization in the next five years,” Nangle highlighted. “Fund managers must determine what they want from one fund to another.”

Often fund managers and investors have ideas about funds that work well on paper, but it may be unclear how to implement the model in practice.

As the semi-liquid fund markets evolve, there will be pressure on costs, which will drive the standardization process for attorneys and outsourcing partners, especially those working with larger asset managers.

“We have observed similar patterns in other financial products in the past where processes are carried out more frequently and therefore become more standardized,” Zwick said, adding that the cost for introducing bespoke funds may be challenging for smaller managers.

The Future of Semi-Liquid Fund Administration

As evergreen funds evolve, the industry will continue to develop new models and solutions and technology is expected to play a key role.

“Technology is the biggest game changer,” Byrnes highlighted. “How that evolves over the next couple of years could really move the dial in terms of market enablement for a lot of private market managers.

Those who leverage the right partnerships, who step into the right type of product structures, and embrace technology in the right way, are going to win because the investor appetite is there.”

Future proofing semi-liquid funds hinges on the ability to advance and scale while providing transparency, adaptive liquidity management, and a consistent investor experience.

Asset managers best positioned for long-term scalability and resilience are those that ensure their operational and legal frameworks are designed from the onset to support growth while remaining flexible to address future opportunities and inevitable complexities.