Interval Funds / Semi-Liquid AIF Structures — The Middle Ground Between Closed and Open-Ended
Investors increasingly want private-market exposure without a decade-long lock-in. Interval and semi-liquid structures are the industry's answer — here's how they actually work within India's AIF framework.
The Liquidity Problem This Structure Solves
Traditional closed-ended Category I and II AIFs lock investor capital for the full fund tenure — often seven to ten years — with no mechanism for an investor to exit early beyond a secondary sale (itself constrained by transfer restrictions and the absence of a deep secondary market in India). For investors wanting private-market returns without accepting total illiquidity for a decade, this is the central friction point. Interval and semi-liquid structures exist to soften it, without abandoning the private-asset investment thesis entirely.
How an Interval Structure Actually Works
An interval fund offers periodic redemption windows — typically quarterly or semi-annual — during which investors can redeem a defined portion of their holding at NAV, subject to caps designed to protect the fund from a liquidity mismatch (since the underlying assets remain genuinely illiquid private investments even though the fund wrapper offers periodic liquidity). Redemption requests beyond the window's cap are typically pro-rated or queued to the next window, rather than honoured in full — a mechanic investors need to understand clearly before committing, since it means "semi-liquid" is a meaningfully different promise from daily-liquidity structures like mutual funds.
Where This Fits Within India's AIF Categories
As with evergreen structures, this is realistically a Category III conversation under current Indian regulation, since Category I and II remain closed-ended by regulatory design. A Category III AIF structured with defined redemption windows and gating mechanisms can approximate the interval-fund model global managers run, though — as with evergreen structures — this means accepting Category III's tax and leverage posture rather than the Category I/II regime.
The NAV and Valuation Discipline This Demands
Offering periodic redemptions at NAV only works if the fund can produce a defensible, independently-supportable valuation at each redemption date — for a portfolio of genuinely illiquid private assets, this is a materially harder exercise than valuing a listed-securities portfolio, and it needs to be built into the fund's operational infrastructure from inception rather than retrofitted once the first redemption window approaches. Managers underestimating this valuation cadence requirement are the ones who run into investor disputes at the first redemption cycle.
Gating Mechanisms and Investor Expectations
A well-structured interval fund's PPM needs explicit, unambiguous gating language — the redemption cap as a percentage of NAV per window, the pro-ration mechanic if requests exceed the cap, and the Manager's discretion (if any) to suspend redemptions entirely in genuinely stressed market conditions. Investors who don't understand these mechanics going in are the investors most likely to escalate a dispute when a redemption request is capped or delayed — making clear, prominent PPM disclosure as much a governance safeguard for the Manager as an investor-protection measure.
Who This Structure Actually Suits
Interval/semi-liquid structures are best suited to strategies with genuinely liquid or semi-liquid underlying assets even if not exchange-traded — structured credit, receivables-based private debt, or listed-plus-unlisted hybrid mandates — rather than pure early-stage venture or long-gestation infrastructure investing, where the underlying portfolio simply cannot support periodic liquidity without forcing distressed sales to meet redemption demand.
Structuring the Liquidity Promise Honestly
The core discipline in building an interval fund is making sure the liquidity the PPM promises is a liquidity the underlying portfolio can actually deliver under stress, not just in calm markets. We help managers stress-test this match before launch, and build the valuation and gating infrastructure the structure genuinely requires.
This article is for general informational purposes and does not constitute regulatory or structuring advice specific to any fund.
CA Anuj Desai