Considerations for semi-liquid private debt

Mercer's publication examines the growing use of semi-liquid structures for private debt, a segment that has seen surging institutional interest in recent years as investors seek higher return potential and diversification. Semi-liquid funds are open-ended vehicles mainly invested in illiquid assets, offering limited liquidity, typically up to 5% of fund assets per quarter, and generally holding a cash or liquid asset buffer to manage redemptions. According to Mercer, demand for these structures originated largely with wealth managers serving the private wealth channel and has been reinforced by broader shifts, including the move from defined benefit to defined contribution pension schemes and from long-term insurance guarantees to unit-linked contracts.

Mercer argues private debt is comparatively well suited to a semi-liquid format. Private debt loans generally have shorter lifecycles than private equity or infrastructure and naturally pay out income, which fits an open-ended structure. The firm lists several potential advantages over closed-ended funds, including faster deployment: semi-liquid funds usually take monthly or quarterly subscriptions and deploy capital almost immediately, avoiding the opportunity cost of waiting up to two to three years for capital calls. Mercer also highlights the ability for long-horizon investors to rebalance exposures and reinvest income, and the operational simplicity of a single subscription and potentially a single redemption payment versus managing capital calls, distributions and diligence on each vintage.

Mercer cautions against treating semi-liquid funds as a solution to liquidity needs. The firm notes the label can be misleading where underlying assets are illiquid and redemption capacity is very limited, and recommends approaching these funds much as an illiquid allocation. It advises combining managers and strategies, spanning direct lending, specialty finance and structured credit, to balance return, diversification, liquidity and risk. Liquidity sleeves create a small drag on performance, requiring a trade-off between liquidity and return. Mercer also stresses that semi-liquid managers must provide regular valuation reports, since investors enter and exit at current prices, making valuation methodology and frequency critical. By contrast, drawdown fund investors are compensated mainly through net cash flows from income and loan repayments.

Mercer concludes that semi-liquid funds can offer greater flexibility and transparency if implemented effectively, though suitability depends on each investor's total portfolio and circumstances. The firm expects routes into private debt to broaden as the investor base grows, with some investors preferring the purer segregation of closed-end drawdown structures.