Editor’s Note: This article was originally published on PitchBook.com.
In the race to make the illiquid private markets more liquid and inviting to investors, one firm has stood out for its ability to raise billions of dollars without relying on institutional sources. Cliffwater broke into fund management in 2019 with a debut evergreen fund dedicated to private credit across a diverse range of middle-market debt managers. Within five years, the Los Angeles-based firm’s flagship Cliffwater Corporate Lending Fund saw its assets blow past the $20 billion mark, collected via a network of registered investment advisers and their wealthy clients. It has an annualized return of 9.64% since inception.
In creating the fund, Cliffwater opted against the rigidity of a closed-end drawdown structure typically favored by private fund managers. To make it more accessible to individual investors, the firm went with an interval fund structure—now a popular open-end perpetual format that mimics a publicly traded mutual fund, complete with a ticker symbol (CCLFX) that trades on the Nasdaq.
Hungry for new assets to drive future growth, PE and private credit shops in the past couple of years have aggressively courted the financial adviser market with a plethora of new interval funds and tender-offer funds, a less-liquid cousin.
Cliffwater went all in on financial advisers to build CCLFX into the industry’s largest interval fund, with assets of nearly $28 billion through March. Rapid growth at Cliffwater and other managers underscores how appealing these products have been for registered investment advisers eager to grab more wallet share of their clients.
“Semi-liquid investment products are a game-changer for the registered investment adviser community,” said Dave Donahoo, head of US wealth management in Franklin Templeton’s alternative assets division. “RIAs are looking for more scalable options.”
Along with privately held Cliffwater, big sponsors like Blackstone, Blue Owl Capital, Ares, KKR, and Apollo Global Management have been loading up on capital raised through open-ended evergreen funds that are registered as 1940 Act vehicles. More than new 30 such products hit the market in the past two years, according to Morningstar, and there were more than 115 vehicles in the interval category alone through February.
Perpetual Capital
This is accelerating an industry-wide fundraising shift, as the largest managers increasingly tap the wealth channel as institutional LP-focused capital formation is drying up. Evergreen, or perpetual, capital made up 41% of funds raised by the top publicly traded PE firms in the fourth quarter of 2024, according to PitchBook research.
Such offerings have boomed in the past few years because they make it easier and more affordable for smaller investors to diversify portfolios with alternative assets like private equity, private credit, and real estate.
Backers of such fund strategies tout how many of the most dynamic and fast-growing companies can only be accessed in the private markets as the global inventory of publicly traded equity shrinks. Often considered “semi-liquid,” interval funds lack the daily redemption liquidity of a traditional mutual fund, but they have quarterly or semiannual buyback windows, subject to some restrictions.
Trillions of dollars may be at stake. Those assets are up for grabs as the PE industry turns its attention to individuals’ wealth, including the “mass affluent,” whose allocations to so-called alternative investments are a small fraction of what institutions have bet.
Private wealth (a pool estimated by Bain & Co at up to $150 trillion) represents about half of all investible capital worldwide, yet exposure to private markets until recently has been limited to ultra-high-net-worth individuals and family offices.
$36 Billion in Assets
No firm has amassed more capital exclusively through interval funds than Cliffwater, whose three vehicles together totaled $36 billion as of March 31, according to the firm. Its AUM is the second-largest after Blackstone and Blue Owl, which raised capital across other types of perpetual funds.
To be sure, some institutional investors find interval funds attractive as well. One key reason is their ability to put funds to work right out of the gate. With standard drawdown funds that are more rigid, investors’ committed capital can sit idle in cash waiting to be called so it can start compounding value, said Phil Huber, head of portfolio solutions at Cliffwater and previously a chief investment officer in a wealth-management firm.
“Whereas in the evergreen structure, you just retain more control over entry and exit timing, position sizing, and rebalancing over time,” Huber said. “That semi-liquidity feature can be helpful in that regard.”
One of the drawbacks to interval funds is what the industry calls “asset liability management.” Liquidity is still a tricky balancing act, should investors look to sell their shares in large volume. Managers are generally expected to fund buybacks at up to 5% the value of shares outstanding. Cliffwater’s flagship fund, now roughly $28 billion, must maintain $1 billion in liquidity to manage redemptions.
Rather than hold that all in cash, the firm manages its obligation using access to credit facilities. A Cliffwater spokeswoman said investors had one redemption opportunity this year, and they “received all their requested amounts.”
Among some of the recent offerings by competitors, Morgan Stanley filed paperwork with US regulators earlier this month to launch a direct lending interval fund that would focus on business development companies. The vehicle is being jointly offered with brokerage Franklin Templeton, which has invested heavily in recent years to acquire asset managers catering to the wealth market.
Last week, Charles Schwab unveiled a new alternatives platform for retail investors, but the brokerage says the offering is open only to customers holding at least $5 million of investible assets at the firm.
Indexing Private Debt
Stephen Nesbitt, a consulting veteran at Wilshire Associates, founded Cliffwater in 2004 not as a fund manager but as a research-intensive advisor to institutional clients. The firm helped draw attention to investing in private credit with its 2015 launch of Cliffwater Direct Lending Index, the industry’s first private credit benchmark.
That helped promote the asset class and elevated Cliffwater’s status as a firm known for connecting pensions and other LPs with top-performing fund managers in private credit. Several top-tier LP advisers have followed a similar playbook to push into the asset management business, including Mercer, Hamilton Lane, Cambridge Associates, and StepStone.
After establishing the corporate lending fund, the firm launched the Cliffwater Enhanced Lending Fund, a more diverse strategy focused on managers across the entire private credit market. This was followed by the Cascade Private Capital Fund, which was acquired in 2023 from Mass Mutual’s Barings unit and converted into a broad-based PE vehicle. In 2023, the PE giant TA Associates took a significant stake in Cliffwater.
Many in the asset management industry are betting that the growth of evergreen fund vehicles will drive private wealth investors to raise their allocations to alternative assets, currently estimated at around 5%. Nestbitt has said he expects that figure to rise as much as 20%, but that could take a few years or more. Private credit has been leading the way in appealing to the wealth channel, but the other main asset classes span real estate, infrastructure, and business development companies.
Whether Cliffwater branches into those other areas remains to be seen. Huber said the firm wants to stay focused for now on its core strength of identifying the best managers in private credit and PE, though he suggests other areas could be next. “We like having a small, concentrated menu of funds,” he says. “And frankly, they’re big asset classes and getting bigger. And we think that means there’s a big opportunity there, above and beyond what we’ve already been able to accomplish.”