Such alignment boils down to restricting withdrawal rights in a way that prevents the fund from having to respond by making fire sales of its illiquid assets at steep discounts. Such liquidity stress is a concern for remaining investors, as they often end up bearing disproportionately high costs when the fund must generate liquidity to accommodate withdrawal requests.

While EU AIFMs previously had broad discretion in designing measures to mitigate liquidity stress, a new framework is being introduced under AIFMD II. EU AIFMs must secure that open-ended funds incorporate liquidity management tools (LMTs) in the fund documentation.

In the context of semi-liquid evergreen funds, the qualification of a fund as open- or closed-ended is not clear-cut. These products offer redemption rights in some form, since permanently locking in investors is neither commercially viable nor legally permissible. When considering the purpose of AIFMD II and the evergreen economic drivers, such funds should only be classified as open-ended if the withdrawal rights are of the type that can cause liquidity stress. This economic perspective is crucial as relying solely on the over-a-decade-old EU definition of open-ended funds does not account for the evolution of evergreen products.

In a run-off model where the fund must only answer to redemption requests when the underlying assets are liquidated in their natural order, and managers have discretion on the timing, liquidity stress cannot occur. In a vintage model where the fund provides perpetual exposure by rolling over investors from one vintage to another, while an investor can only withdraw when a vintage reaches its term, liquidity stress likewise cannot occur.

Certain EU semi-liquid evergreen funds considered as closed-ended from a regulatory perspective are marketed as open-ended from a commercial perspective. This typically occurs when the EU fund is part of a US fund structure that is branded as open-ended according to the US concept, which differs from the EU regulatory definition of open-ended funds. In these circumstances, suitable disclosures must be made in accordance with EU requirements to ensure that investors are fully aware of the restricted nature of withdrawal rights.

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