The emergence of semi-liquid funds targeting private wealth channels has been a recurring theme in the asset management space over the last few years, writes Joel Grossmark, a partner at City law firm Travers Smith.
These funds, pioneered by the world’s largest multi-strategy asset managers like Blackstone, KKR, Ares, Carlyle, Brookfield, and Oaktree, have opened doors to a diverse array of private asset investment strategies, including private credit, real estate secondaries, and infrastructure.
This shift has been heralded as a new era in asset management – creating access for a whole new investor base of non-professional investors with deep pockets, to previously inaccessible private assets. And with both substantial capital raised to date and an identified excess of untapped capital in the private wealth sector, it is clear that European semi-liquid funds are here to stay.
But these structures are fundamentally different to asset managers’ usual institutional offerings. Managers that have been watching these developments with increasing interest should therefore carefully consider how these funds’ distinct features interplay with their existing business.
Private Assets: Access (Almost) All Areas
In recent times, the Luxembourg fund structure known as a “UCI Part II” has served as the primary vehicle for asset managers to tap into private wealth channels. Its flexibility and established framework have allowed managers to successfully build up their semi-liquid businesses and raise capital across Europe and Asia.
However, despite the UCI Part II’s success, it is not without its limitations. Crucially, it does not offer automatic access to below professional investors outside of Luxembourg so the intricacies of local regulations across each EU (and non-EU) jurisdiction still need to be navigated, requiring additional registrations, translations and appointments. Although this is straightforward enough in EU member states such as Italy and the Netherlands (where the local rules are not insurmountable), the restrictions in countries like Spain and Germany present a major challenge meaning that, oftentimes, those coveted below-professional investors remain out of reach.
Introducing ELTIF 2.0: the revamped European Long-Term Investment Fund
Originally introduced in 2015, the ELTIF has undergone a significant overhaul to enhance its compatibility with semi-liquid funds focused on private assets. The original ELTIF faced challenges due to stringent rules regarding portfolio composition and leverage, which made its operation clunky and significantly limited its appeal for most asset managers.
Recognizing these hurdles, the European Union updated the rules in 2024, resulting in ELTIF 2.0: a more flexible, potentially evergreen structure that accommodates a wider range of private investment strategies. Under these new regulations, managers can establish funds targeting any investor class—including both sub-professional and truly “retail” investors – across the EU without a minimum investment requirement and without the need for additional registrations.
While this opens new avenues for fundraising, it also includes certain restrictions aimed at protecting retail investors, which could result in lower returns compared to an equivalent UCI Part II.
Never-ending Story: the Challenge of Evergreen
Both UCI Part IIs and ELTIFs can be structured as open-ended vehicles with an indefinite term. While there is an obvious attraction to housing high-performance assets in an evergreen structure (making it an ideal vehicle for secondaries), their operation creates challenges for managers more used to managing closed-ended limited partnerships. For example, do they have a sufficient pipeline of high-quality investments to service monthly capital inflows (to avoid cash drag on these fully funded structures)? Is there sufficient liquidity in the portfolio to service potential redemption requests? Will allocations to the evergreen vehicle conflict with obligations owed to existing closed-ended products?
In addition, European semi-liquid funds take time to achieve critical mass, and so managers stepping into this space need to have the patience to see it through, given the initial resource required to get them off the ground.
Stick or twist? Choosing Between ELTIF and UCI Part II
As managers explore entry points into the semi-liquid market, the obvious question is whether to stick with a UCI Part II or twist on an ELTIF? As you would expect, the answer is always nuanced. The decision largely hinges on your target jurisdictions. If your focus is below-professional investors in markets like Germany and Spain (where it is harder to reach such investors), the EU-wide retail marketing passport of the ELTIF offers a clear advantage over the patchwork of unharmonsied marketing rules applicable to the UCI Part II.
Conversely, by way of example, if your key markets are Italy and the Netherlands— where local regulations are generally more facilitative for semi-liquid products— the UCI Part II might still be the better choice. Ultimately, the calculation involves weighing the broader market access provided by ELTIF against increased operational complexity and potentially reduced returns. For many, the compromise has been to leverage the established UCI Part II structure to build their semi-liquid track record, with an eye toward launching an ELTIF in the future if they identify gaps in their market reach.
Panacea or Pandora’s Box?
The semi-liquid fund market in Europe is evolving, driven by both the innovation in fund structures and burgeoning demand for private asset access among wealthy investors. The introduction of ELTIF 2.0 marks an important step forward, providing a viable additional pathway for reaching a wider investor base but still presents challenges around returns and regulatory compliance. Before opening the semi-liquid box, asset managers must balance the obvious attraction of increased sticky AUM and an evergreen home for high-performance assets against their unique circumstances, market opportunities, and regulatory environments to make informed decisions that align with their long-term business goals. As the market matures, those who can effectively find that balance will position themselves for success in the dynamic world of European private wealth investing.
Joel Grossmark is a partner at City law firm Travers Smith specialising in funds