Why LIC's are a superior structure to access for alternative asset opportunities

The emergence of open-ended evergreen funds has allowed more wholesale investors to access alternative asset classes such as private equity, real estate, infrastructure, and private credit. This greater access is a welcome development—after all, institutional investors have been allocating to these strategies for decades. By enabling wholesale investors to gain exposure to these long-term strategies, evergreen funds are playing an important role in the democratisation of alternative assets. While evergreen funds represent progress, they are not without significant structural compromises—particularly when it comes to liquidity and portfolio management.

At the heart of the issue is liquidity, usually offered monthly or quarterly. However, this liquidity is not guaranteed. Most evergreen structures include provisions allowing managers to gate or freeze redemptions at their discretion, particularly in times of market stress. So, while these funds offer the “promise” of liquidity, there is no guarantee liquidity will be available.

Today, these risks are largely masked by strong inflows, with wholesale investors increasing their allocations to alternatives as fund managers broaden their offerings to the wealth market. However, once investors are fully deployed and we experience a market shock, the mismatch between the liquidity offered and the illiquidity of the underlying assets could become a serious problem for many of these vehicles.

Listed investment companies (LICs), on the other hand, provide a more robust and transparent structure. Capital is fixed, meaning the portfolio manager is not subject to investor flows as the portfolio is managed as a closed end pool of capital. This allows for genuine long-term investing without pressure to deploy capital quickly or to sell assets to meet redemptions. Investors can buy and sell shares intra-day on the ASX, but this activity has no influence on how the underlying portfolio is managed. Crucially, the performance of the investment portfolio is not impacted by the behaviour of investors in the fund —a factor which is apparent in open-ended structures. LICs also offer tax advantages and more consistent and reliable income. As listed companies, they can retain earnings and distribute franked dividends at a pace and level set by a board. Trust structures, by contrast, must pay out income as it is received for tax purposes, which can result in less predictable distributions—particularly in alternative strategies where income generation is less consistent (perhaps with the exception of private debt).

One commonly cited hesitation toward LICs is the discount or premium to net tangible assets (NTA) at which a company may trade. This is not a flaw—in fact it’s one of the structure’s defining features. It reflects market sentiment and creates opportunity for investors to acquire exposure to high-quality assets at a discount. And for those focused on the long term—as all investors in alternatives should be—the real focus should be on growth in NTA over time. The share price may deviate from NTA in the short term, but the value of the underlying assets should compound over time, and more active investors can take advantage of these short-term discounts and premiums to add to underlying portfolio returns.

Evergreen funds are sometimes preferred by investors seeking to reduce volatility in their portfolio through alternative assets with less frequent mark-to-market movements, in a structure with perceived less exposure to market sentiment. However, the pressures of investor inflows and outflows in an open-ended structure can force portfolio managers to increase turnover and counteract the inherent low volatility of alternative assets. In a LIC, the low volatility of alternative assets can be preserved and is independent of market behaviour. This can be seen through WAM Alternative Assets (ASX: WMA), which has delivered investment portfolio returns since the appointment of Wilson Asset Management as Investment Manager in October 2020 at a volatility of 3.2%, as measured by standard deviation of the underlying investment portfolio. The total shareholder returns for WMA, a measure of share price movements and dividends paid to investors, displayed a volatility of 9.6% over the same period, reflecting the share price deviations from NTA that long-term investors can look through. Both measures of volatility are significantly lower than the Australian equity market, represented by the S&P/ASX All Ordinaries Accumulation Index, which displayed volatility of 13.2% over the same period.

In summary, while evergreen funds have expanded access to alternatives and are a positive step for the industry, LICs offer a cleaner, more aligned solution for managing long-term, illiquid alternative strategies. They provide genuine daily liquidity, tax-effective income, and the freedom for the investment portfolio managers to remain fully focused on delivering long-term performance for investors.