Mark Meiklejon, head of real asset global investment specialists at London-based asset manager Aviva Investors, says that at a semantic level, “the definition of hybrid funds will mean quite a lot of different things to different people in different markets”.
At its most basic level, many investors will interpret hybrid funds as the investing of liquid assets alongside illiquid assets and the co-mingling of listed alongside private assets within a semi open-ended or semi closed-ended structure, while trying to harness the illiquidity premium of private markets on a long-term basis.
“The challenge is that nobody wants to pay the cost of the illiquidity premium, which is illiquidity,” Meiklejon says. “The concept of trying to solve some of the negatives that investors see around illiquid allocations is not a new one: it’s been around for a long time. The fundamental issue that hybrid funds are trying to solve is providing a more liquid exposure to a blend of illiquid assets.”
Investors such as a sovereign wealth fund, an endowment or an immature defined contribution pension fund with a 20/30/40-year investment horizon are happy to lock up capital and typically do not need to pay for the cost of liquidity, which they have little need for. “Liquidity comes at a cost for investors and typically that’s volatility,” says Meiklejon.
With cash paying 5% in most markets since the Covid pandemic, the attractions of private markets have dimmed over the past couple of years, but Meiklejon expects prospects for the asset class to improve as interest rates are, as widely expected, cut over coming months.
Looking at the survey findings that form the basis of this research, Meiklejon said the high level of interest in launching hybrid funds was “fascinating”, as was the interest in targeting “relatively small” funds of less than €500m which would seem to suggest that firms are targeting retail investors.
On the target audience, Meiklejon said he had expected a higher proportion to target retail, family offices or high net worth individuals and that the institutional investor number was higher than he expected, given the fact that institutional investors have less need of liquidity and hence hybrid funds generally.
Meiklejon adds that the preferred target asset class shown by the survey, with a heavy dominance of private debt, concurs with Aviva’s view that private debt is the most mispriced asset class relative to private equity and, compared to more traditional private markets, is currently particularly attractive.
This interview was first appeared in a joint Funds Europe-Caceis research report on hybrid funds published earlier this year. Click here to view the article.
