To gate or not to gate

Over the past year, several high-profile private retail funds (most notably in the United States) have faced large redemption requests, drawing significant media attention. This trend has been particularly pronounced in the private credit sector, where concerns have emerged that software companies—major recipients of private credit financing—may be vulnerable to disruption from artificial intelligence. Managers have responded to these pressures in different ways: some have suspended redemptions entirely, others have applied gating restrictions, and some have continued to honour requests in full, including those exceeding the thresholds set out in their governing documents. This article examines the key considerations underlying these differing approaches to gating.

What you need to know

• Gates have a protective function and are intended to protect investors and the portfolio.
• While gating must be implemented with care, not gating is not necessarily the solution.
• Gating should be perceived by the market as a normal liquidity tool, not as an indication of trouble.

How retail capital affects the redemption dynamic

While alternative assets were historically the domain of institutional investors due to a variety of reasons, including regulatory constraints and the illiquidity of closed-end funds (and of these classes of assets more generally), managers have sought in recent years to access the capital of retail investors by launching evergreen or semi-liquid funds that provide exposure to alternative assets with the possibility to redeem at regular intervals, usually on a monthly or quarterly basis. There has also been a higher demand for private assets by retail investors themselves.

Retail investors are generally more prone to making redemption requests for several reasons. They are more exposed to unexpected life events (e.g., sickness, death or deterioration of financial condition) and tend to be more sensitive to short-term market developments. This creates a mismatch between their liquidity needs and the inherently illiquid nature of alternative assets, which are characterized by long holding periods and total fund durations that can exceed 10 years, depending on the asset class. In addition, retail investors are accustomed to the transparency of public markets, with their standardized and plain language disclosures and daily valuations. In comparison, private assets provide limited visibility into portfolio composition and performance, and rely on more complex and less frequent valuations. This relative opacity can amplify reactions to unfavourable news. As a result, retail funds face a higher likelihood of correlated redemption waves during periods of market stress.

Gating strategies

Fund documents typically impose redemption restrictions in the form of notice periods, lock-up periods, quarterly caps, queue mechanics, early redemption fees, conditions (e.g., the fund having sufficient liquidity), and/or limited circumstances that can trigger a complete suspension of redemptions. When redemption requests are received, the manager must determine whether or not to gate—a decision that carries not only practical consequences, but also sends signals to investors and the market.

Gating: safeguarding the fund while managing reputational risk

As alternative assets are intended to be held for an extended period of time and exited in a carefully planned manner to maximize value, the redemption restrictions set out in fund documentation are designed to prevent the manager from being compelled to dispose of assets in unfavourable conditions, or to incur indebtedness to satisfy redemption requests. The application of gates gives the manager the necessary time to elaborate and execute a plan that addresses redemption requests without undermining portfolio performance. This, in turn, protects non-redeeming investors from being prejudiced by redemption requests, and signals to prospective investors that the sponsor acts rationally with respect to gating decisions.

While gating serves a protective function, there is often a negative reputational impact associated with it. Even when redemption requests are not correlated to the quality of the fund’s assets or the fund’s general outlook, gating can erode investor confidence and create a perception of being “locked in”, prompting investors to submit redemption requests preemptively to avoid being last in the redemption queue. The enforcement of redemption restrictions may also attract investor scrutiny, particularly from retail investors who may not fully appreciate—despite disclosure—the practical limitations on redemption rights or the mechanics governing redemptions, and whether the fair treatment of all investors is ensured.

Beyond investor perception concerns, gating may also result in negative tax consequences for investments structured as “unit trusts” (such as mutual fund trusts) and investments structured to permit investment by registered plans. For tax purposes, certain types of “unit trusts” must meet a “redeemable on demand” test. Suspensions risk that the trust may no longer qualify for the advantages of being a unit trust, including that it may no longer qualify as a mutual fund trust. Loss of mutual fund trust status can result in alternative minimum tax, application of the 21-year deemed disposition rule, loss of the capital gains refund mechanism, and loss of qualified investment status for registered plans. To alleviate these issues, some trusts may seek to maintain redemptions by redeeming in kind. If a redemption is settled with a promissory note (a “redemption note”) rather than cash, the redemption note may be considered a non-qualified investment, and the registered plan holding it would be subject to a penalty tax on the investment and to additional filing/reporting obligations. Gating may also particularly affect registered retirement income funds (RRIFs), which are required to make minimum annual withdrawals and may be unable to do so.

Not gating: balancing investor confidence and risks to the portfolio

The full satisfaction of redemption requests, particularly if those are substantial, may reinforce investor confidence that the fund has the necessary liquidity to sustain redemptions, even in stressed market conditions, and convey the manager’s confidence in the robustness of the portfolio, thereby mitigating the risk of a “run to the exit”.

However, the complete absence of gating is not necessarily the solution. It carries the risk of prejudicing non-redeeming investors who could face poorer portfolio performance as a result of the untimely liquidation of certain assets. In addition, the decision not to enforce gates may raise concerns as to whether the fund is ensuring the fair treatment of investors by balancing appropriately the interest of the redeeming and non-redeeming investors. Such concerns can have implications for fundraising, as prospective investors may view the absence of gating as indicative of a weaker and less rational approach to liquidity management.

As a result, gating should be seen simply as a mechanism designed to manage the liquidity mismatch, not as an indication of trouble with respect to investors’ confidence or with the portfolio. While any tax impact associated with gating mechanisms should be taken into account, sponsors and investors should consider the application of the gates as a normal-course event and avoid any negative association unless there are other concerns or unless the sponsor seems to be abusing the fund’s gating mechanisms. When a liquidity event occurs, if timing is not right to sell assets and other liquidity tools are not sufficient, managers should not feel pressured to avoid gating. The reactions we currently see in the market are likely the result of a learning curve occurring with respect to the evergreen retail structures. As gating becomes more common, we can expect that retail investors will learn to live with the existence of these mechanisms, take them into account in their tax and investment planning, and cease framing them automatically as concerning occurrences.

Mitigation tools

To mitigate the risk that the enforcement of redemption restrictions trigger panic among the investor base, the redemption terms, gates, and mechanics should be clearly articulated in the fund documentation. Disclosure on what factors the sponsor intends to consider when deciding to implement gating strategies would prove helpful. The sponsor should proactively establish what assets it may consider selling to meet liquidity needs in any given time period, and conduct regular fair and robust valuations for such purposes, to avoid making any such analysis or decision when facing a liquidity event. Fund managers should also engage proactively with wealth managers and dealers to ensure that alternative products are only distributed to investors whose investment goals and liquidity expectations are and remain aligned with the inherently illiquid nature of those assets, and who are fully aware that their capital may remain inaccessible despite periodic redemption rights. In most cases, such alignment will depend largely on education and on better communications and transparency—not only at the time of subscription, but also as the portfolio grows and evolves, and upon the occurrence of liquidity events.

CSA Staff Notice 81-333 Guidance on Effective Liquidity Risk Management for Investment Funds is aimed at investment funds subject to National Instrument 81-102 (NI 81-102) and discusses various approaches to effectively manage liquidity. Those approaches and tools include, among other things, entrusting the oversight of liquidity management to the investment committee or any other committee that is independent of the portfolio management function, and conducting stress tests to assess the fund’s ability to meet redemption requests during a liquidity event or distressed market conditions. It should be noted that CSA’s proposed amendments to NI 81-102 and its companion policy published on November 27, 2025, if approved, would make certain liquidity risk management obligations binding and applicable to all investments funds, including private funds. While some of the requirements included in the proposed amendment are ill-adapted to private funds, sponsors should be proactive in voluntarily implementing some of these measures (even if these amendments are not adopted or end up not being applicable to private funds).

Conclusion

The gating of redemptions is an inherent mechanism to semi-liquid alternative funds. To paraphrase Jon Gray, Chief Operating Officer and President of Blackstone, illiquidity is a feature of those products, not a bug. It is the trade-off for the higher return potential offered by alternative assets, and these products are simply not suitable for investors who cannot withstand having their capital tied up for extended periods. In other words, if retail investors and wealth managers rely on these funds for their liquidity needs, it means that the investment in such funds was not properly balanced with the rest of the investor’s portfolio. Redemption requests and a fund’s inability to satisfy all of them are not indications of portfolio or industry distress, or of any failure by the fund sponsor. The enforcement of redemption gates, to the extent that it is predictable, properly disclosed, and equitably structured, reflects rational fund management.