Hybrid funds account for 40% of launches in H1 2023, up from 20% in H1 2021
Structures allow greater flexibility and diversification within asset classes
“Liquid-asset hybrids” mixing public and private exposure dominate in private debt
October 13, 2023 (Preqin News) – Private capital funds aimed at combining the benefits of public and private assets account for a growing number of fund launches, according to administrator Citco, driven by the growth of private debt and GPs seeking to attract more capital from new sources.
The rise in popularity of hybrid funds, which combine public and private market assets in a closed- or open-ended fund structure, has seen the proportion of hybrids in Citco’s client base double in the last two years.
Based on a sample of approximately 2,000 funds on its private markets book, hybrid funds accounted for almost 40% of funds launched in the first half of 2023, compared with 20% in the same period of 2021.
The development of hybrids, which Citco says seek to source more capital from private wealth and individual investors in particular, coincides with a tightening in fundraising markets. Further innovation in fund structures is likely as GPs seek to extend their appeal to a wider investor base.
“Hybrid means different things to different people across the industry. The concept has been around for a long time, particularly in relation to credit, and it’s here to stay,” Claudia Bertolino, Head of Private Equity and Private Credit at Citco Fund Services (USA) told Preqin News. “We've seen examples of hybrid structures and product offerings across all asset classes in the alternative investments industry. Hybrid structures afford flexibility and diversification within these asset classes, giving LPs the opportunity to blend and manage their exposure.”
The firm places private market hybrid funds into two categories. “Illiquid-asset hybrids” are designed to boost liquidity in an otherwise illiquid private markets fund by adopting an open-ended structure and are intended to attract more capital from private wealth. Meanwhile, “Liquid-asset hybrids”, apply a closed-end structure to a largely liquid portfolio. That structure limits investor liquidity and leaves GPs with greater flexibility to introduce a broader mix of assets to increase yield.
For the illiquid-asset hybrids in its client base, Citco says between 5% and 30% is held in cash or liquid assets, depending on the fund strategy. For liquid-asset hybrids, which dominate in private debt, the portion ranges from 5% to 70% of the portfolio.
Bertolino says these structures are blurring the lines between discrete fund types and bring significant operational complexity.
“Our clients are striving to simplify and automate the servicing of both the illiquid assets and liquid asset hybrids,” she says. “For instance, your fund accounting platform for actively traded assets needs to communicate swiftly and accurately to an allocation engine for closed ended funds, so the GP needs automated asset processing with full investor asset transparency. At the same time, we’re experiencing reporting compression, with the timeframe to provide this data, both to GPs and then to their LPs, really beginning to accelerate towards near real time.”
Preqin has recorded 901 debt fund launches across corporate, real estate, and infrastructure in 2023 to date, already 41% higher than all launches in 2021. The proportion of private capital funds investing directly in assets (not including co-investment, fund-of-funds, and secondaries) with debt strategies has increased from 9% in 2021 to 12% in 2023 YTD.
The scale of the private wealth market is difficult to quantify, but Preqin’s premium Insights+ report, Fundraising from Private Wealth: A guide to raising capital, notes that family offices manage around $4tn of assets and have a sizeable average allocation to private equity of 27%, while wealth managers and high net worth individuals have plenty of headroom to increase their investments in alternatives, if there are appropriate routes to market for them.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.