Australia is 'laissez-faire' on eligibility for semi-liquid investments: Morningstar

While investors in the US are becoming increasingly acquainted with semi-liquid structures, the story is vastly different here in Australia due to its regulatory landscape, Morningstar said.

Morningstar's Demystifying Semiliquid Fund Structures - An Asia-Pacific Perspective report compared the semi-liquid dynamics in economies across the region and found Australia is notably more lenient when it comes to investor eligibility than other jurisdictions like Hong Kong and Singapore.

It said Australia is notably "laissez-faire" on investor eligibility, and while there are income and asset tests, such as the wholesale investor test, to distinguish between retail and sophisticated investors, access to private asset products is easily available to individual retail investors via vehicles such as evergreen funds and listed investment vehicles (LIVs).

Typically, open to all investors and mainly exclusive to Australia, listed investment trusts (LITs) or companies (LICs) are the closed-ended cousins of ETFs.

"... while ETFs are open-ended and can use market makers to help steer pricing close to net asset value (NAV), LIV prices are driven by supply and demand; they can trade at big discounts or premiums to NAV," the report said.

And this vehicle is gaining traction in Australia for private credit, where LITs are particularly differentiated in how they enable liquidity.

Due to the closed-ended structure, once launched, the manager is no longer involved in facilitating applications or redemptions; in short, LITs are liquid and cannot be gated.

"A positive of these structures is that, in poor market conditions, managers are not forced sellers of underlying assets to meet redemptions. Similarly, they are not forced to deploy new investor inflows, potentially bidding up asset prices," Morningstar said.

"While these structures offer ample liquidity, it comes with a catch for investors - they can exhibit meaningful price volatility and trade at market prices significantly below underlying NAV - something we cover in the next section on valuations."

Further, private credit managers may earn "generous origination fees" from their borrowers, which are often fully passed on to investors, the report noted.

However, this is also an issue where Australian managers may retain a portion of such fees without having to disclose their quantum to investors.

"Separate from presenting potential conflicts, origination fee retention enables managers to reduce disclosed management fees artificially; investors may be attracted to a well-priced fund, unaware that the income they'd otherwise receive is being retained by the manager," it said.