Drawdown vs. Semi-Liquid Private Equity funds

Traditionally, Private Equity investments were associated with drawdown funds, with minimum investments running into the $millions and limited liquidity.

As a result, for decades Private Equity funds have been the preserve of institutional investors – from Harvard and Yale Endowment Funds to the New York State Common Retirement Fund – and ultra-high net worth individuals.

Recently, new fund structures have emerged, allowing easier access for eligible private investors.

Historically, the majority of Private Equity funds have followed a ‘drawdown’ model. These closed-ended funds (often structured as a limited partnership) are managed by a private equity or venture capital firm, known as a ‘General Partner’ or ‘GP’.

They enter the market specifying the total capital required over the life of the fund.  

Investors – typically large institutions, such as pension funds and sovereign wealth funds which might allocate 10-20% of their portfolio to these assets – will make initial commitments to the fund.

Once it receives enough commitments to meet the target, the fund closes to new investment.

As investment targets are identified, the capital committed will be drawn down through a series of capital calls – often to be paid at short notice – hence the name ‘drawdown funds’. This is known as the fund’s “investment period”. It can take several capital calls over c.3-4 years for funds to be invested.

Drawdown funds can have a life of 10 or more years. Investors receive distributions during the life of the fund, usually after its initial investment period, following any realisations.

Drawdown funds are largely off-limits to private investors due to their illiquid nature and high investment requirements. They often stipulate minimums of up to £5-10 million.

That said, it is sometimes possible to invest a lower minimum. For instance, Wealth Club has negotiated access to a specialist distressed debt fund for a minimum commitment of $150,000 (normally $10 million).

Relatively recent regulations and financial innovations have opened Private Equity to smaller, non-institutional clients.

One important milestone for private investors has been the emergence of Semi-Liquid Funds. These structures offer investors a simpler, more flexible and more liquid way to access Private Equity. They are growing in popularity: over the five years to the end of 2023, the number of semi-liquid funds globally has almost doubled to 520, with estimated assets of at least $350 billion.

In contrast to drawdown funds, semi-liquid funds are evergreen and accept new capital and allow redemptions on a rolling basis – normally once a month or quarter (although a long-time horizon is still encouraged).

(Note: funds may place a limit on total redemptions in any one period. Accordingly, it is not guaranteed an individual investor will be able to liquidate their holding within a given redemption ‘window’.) 

Investors can buy (and sell) at a prevailing Net Asset Value (NAV) and as soon as the deal is placed, they are fully invested and get exposure to the fund’s existing portfolio.

The price for that liquidity is usually higher charges compared to a drawdown fund.

Investment minimums are also much lower. For example, through Wealth Club, experienced investors can participate in Private Equity funds for as little as £10,000.