Here come the secondary funds.
The Securities and Exchange Commission’s recent decision to drop guidance that required closed-end funds sold to retail investors to limit their helpings of private funds to no more than 15% of net assets could boost secondary funds and other funds-of-private funds. Investors have good reason to be cautious around these offerings, though.
Before regulators formally lifted the informal rule on Aug. 15, 2025, closed-end funds and their cousins—interval and tender offer funds—that put more than 15% of their assets in private funds could only sell themselves to accredited investors, or individuals with a net worth of more than $1 million or an annual income of at least $200,000.
Many closed-end fund purveyors have anticipated the change since SEC Chairman Paul Atkins said in May that the commission may eliminate the requirement. Since then, a swathe of interval and tender offer funds updated their prospectuses to remove any mention of accredited investors. The change will make it easier for such funds that use multimanager approaches—that is, investing in other managers’ funds—to invest in private markets to sell their wares to retail investors.
The old limit applied to private fund exposure only, though. Closed-end funds were able to and still can invest as much as they wish in private debt or equity securities, whether they limit themselves to accredited investors or not.
Both private funds and direct private equity or debt investments are illiquid, opaque, and risky. The SEC seems to have singled out private funds, however, because they can charge significant fees that are often not explicit in expense ratios.
What Does This Mean for Investors?
The secondary managers are coming for you! What are secondary funds? These are funds that invest in existing private funds. They are funds-of-private-funds that seek to provide private market exposure to investors by investing in multiple managers’ private funds. In theory, these are about as close to a broad private market exposure as an investor could get.
They’re not without their controversy, though. Secondary managers have a habit of buying these funds at discounts to their net asset values and then immediately marking them back up to their NAVs once they own them. This can create illusory returns, as the apparent gains are just on paper and the result of an accounting trick. Secondary managers who do this are essentially pulling future returns into the present by assuming they can at least get the private fund’s NAV if they have to sell it today, even though they may have bought it yesterday at a discount.
Investors should make sure the managers of these strategies have histories of generating realized returns, not just early paper gains that give the appearance of skill.
Liquidity Risk Is Very Real
Beyond the NAV shenanigans, the underlying private funds often bring an additional layer of illiquidity risk, as they only offer periodic liquidity or, oftentimes, none at all. In periods of sustained outflows, this lack of liquidity can create massive issues. Take Bluerock Total Income + Real Estate Fund for example. The real estate interval fund of private funds is trying to convert into a listed closed-end fund to avoid having to sell its holdings at fire-sale prices due to mounting redemption requests.
The Bluerock portfolio, according to its last annual report, had around 20% of its assets invested in private funds that provided no periodic liquidity. These funds won’t repurchase any shares, so Bluerock would need to find a buyer on its own (and sell at a likely discount) if it wished to raise cash from those holdings. So, while Bluerock’s investors are asking for their money back, Bluerock cannot ask for its money back from a large chunk of its portfolio. Ultimately, the Bluerock CEO acknowledged the situation, telling The Wall Street Journal, “At some point the ability of the structure to withstand this kind of redemption pressure gets exhausted, notwithstanding the quality of the assets you hold.” Investors feeling the lure of private markets should burn this quote into their minds.
Bluerock wants to change to a listed closed-end fund to eliminate the flows problem and avoid a fire sale, since listed closed-end fund investors buy and sell shares with each other on an exchange rather than with the fund company. Conveniently for Bluerock, the conversion also would enable the firm to preserve its fee-generating asset base rather than selling assets to meet redemptions. Should shareholders approve the conversion, they will likely have to transact at a significant discount to the fund’s NAV once the fund begins trading, which may be worth it to some investors, but harm those who invested on the promise that they would be able to buy and sell at NAV.
Illiquid Assets Cannot Handle Outflows
Simply put, outflows are the Achilles’ heel of illiquid assets. Once they start, they’re hard to stop, and they can inflict a lot of damage. With secondaries and other funds of private funds, the problem is perhaps more pronounced due to the underlying funds’ structural liquidity limits. Bluerock is far from an outlier as a fund of private funds. Plenty of secondary funds have the majority of their assets in private funds that offer no periodic liquidity or repurchase programs. Granted, these private funds may make distributions that can help offset redemptions, but continued outflow pressure will likely result in these funds having to sell their positions at discounts. It’s hard not to imagine more Bluerocks happening once the retail spout is turned on.
Funds with regular liquidity obligations like interval funds are especially susceptible, but tender offer funds are, too, as they generally aim to provide regular liquidity and acknowledge not being able to do so could cause a further run on the funds. Listed closed-end funds should be better able to hold illiquid private funds because they raise their money at their IPOs and don’t have to regularly repurchase or redeem shares, which trade like stocks or exchange-traded funds. Still, if investors rush to sell their shares it will put downward pressure on prices.
Proper liquidity management programs can help mitigate these risks, but transitory money is still a nightmare for these strategies. Asset managers and financial advisors need to educate investors to make sure they take a truly long-term approach with them.