Morningstar Inc. has expanded its fund medalist rating framework to include semiliquid funds in the latest step in the rapidly increasing adoption of evergreen funds as a preferred vehicle for allocating capital to private markets. It will begin assigning the ratings in the third quarter of this year.
The universe of evergreen investments includes interval funds, tender offer funds, non-traded REITs and business development companies in the United States, along with several non-U.S. structures. Unlike traditional drawdown vehicles, evergreen funds tend to have lower minimum investments (making them accessible to accredited investors rather than qualified purchasers), no capital calls, simplified tax reporting and limited liquidity mechanisms.
Major alternative asset managers include Blackstone, Apollo, KKR, Partners Group, Franklin Templeton, Hamilton Lane, Cliffwater and others are active in the space, and new funds are entering the market at a rapid pace, typically with a handful of new funds getting filed with the SEC or becoming effective each week.
“Semiliquid funds are becoming more accessible and gaining traction in the investment landscape, but their unique structures present challenges that warrant a reliable framework for evaluation,” Laura Lutton, Morningstar’s global head of manager research, said in a statement. “Morningstar has a long track record of helping bring clarity to complex areas of the market. With this new rating, we are applying that same rigorous approach to help investors assess these strategies with confidence and make well-informed decisions.”
Other companies track the sector, including XA investments, a Chicago-based investment manager that provides registered closed-end fund structuring and consulting that tracks launches and flows into interval funds and tender offer funds, and Robert A. Stanger, which tracks non-traded REITs and non-traded BDCs, in addition to interval funds. XA Investments also recently created an interval fund index. Morningstar’s move adds a quality screen to the mix.
The methodology is “tailored to account for the distinct structures, liquidity constraints and potential private asset exposures of semiliquid vehicles.” Morningstar also published an explainer article.
According to the piece, through the end of April Morningstar tracked around 500 U.S. semiliquid funds, including 143 interval funds with close to $100 billion in assets.
“The goal is to help investors decide if these more costly, less liquid, and more opaque strategies are worth it,” Karen Zaya, associate director for Morningstar, wrote in the piece. “Do they actually offer diversification benefits or return potential that affordable, liquid and transparent mutual and exchange-traded funds can’t approximate?”
The ratings will use Morningstar’s five-tier scale—Gold, Silver, Bronze, Neutral, and Negative—to “express conviction in a strategy’s potential to outperform over the long term, while also guiding investors and selectors with insights on a strategy’s role in the portfolio, risks, and potential outcomes across varying market conditions.”
The ratings will attempt to identify strategies it expects to outperform “public market benchmarks, private market indexes, and peer groups over the long term and flag strategies likely to underperform.” They will also assess suitability for investors, based on goals, liquidity needs and risk profiles, and provide context such as fees, manager tenure asset size and investment approach.
The move is the second private market initiative Morningstar has rolled out in recent months. In January, it joined forces with PitchBook to launch an index that tracks 30 of the largest and most liquid late-stage venture capital companies globally. Called Morningstar PitchBook Unicorn 30 Index (UI30), it tracks VC-backed companies valued at $1 billion or more, including SpaceX, Open AI, Stripe and SHEIN.
In addition, in March it acquired Lumonic, which developed a private credit portfolio monitoring and management product.