Is the Growth of Evergreen Funds Good or Bad for Private Markets?
By Sloan Smith
Offerings for private investments have changed dramatically in recent years. Access to private markets is typically provided through a drawdown vehicle, where limited partners (investors) commit a certain amount of capital to a private fund and the general partners (portfolio managers) call or invest the capital over time, as opportunities arise. The investment period is usually three to five years, though a drawdown strategy and the full lifespan of the fund is normally ten to twelve years, the end of which is the time when the general partners start selling private investments in their portfolio and distributing the proceeds back to investors.
More recently, the growth of private market evergreen funds, which raise capital, invest, and distribute returns without needing to wind down or liquidate after a fixed term, has provided a new avenue to get immediately allocated to private markets. Since 2019, there have been more than 200 evergreen funds launched that now manage close to $400 billion in assets.[1] These evergreen products help general partners avoid common issues with irregular fund launches and end of life liquidations. For limited partners, these funds provide an easier way to make private investments where investors can get fully allocated and potentially benefit from strong long-term compounding returns.
There are issues that must be considered when deciding to invest in an evergreen strategy. It is important to monitor the potential advantages and disadvantages of evergreen vehicles, especially if they are part of your greater asset allocation.
Evergreen Fund Advantages
1. Immediate allocation to private markets
Through an evergreen fund, an investor can purchase shares in a product at its current net asset value (NAV). These funds usually provide exposure to a diversified pool of private assets, which not only minimizes risks but also offer the potential to generate robust returns relative to public markets.
2. Flexibility
Most evergreen funds offer periodic redemption windows (e.g., quarterly or semi-annually), which allow investors to redeem a portion or all of their investment without waiting for distributions, which in some cases can take ten or more years to occur. Also, it eliminates the need to raise cash from other parts of a portfolio to meet capital calls.
3. Reduced J-curve effect
The J-curve, a concept showing how returns to private investors are often negative in the early years due to fees and initial costs, may be smoother with evergreen funds, since many hold mature positions and recycle distributions.
4. Ongoing reinvestment
Like a mutual fund, the proceeds from exits or income-generating private assets (e.g., private debt) can be reinvested automatically. This can assist in compounding returns without having to recommit to a new drawdown fund.
Evergreen Fund Disadvantages
1. Potentially lower return profile relative to drawdown vehicles
Recycling capital and raising cash to manage potential redemptions can have a negative impact on returns relative to drawdown structures that lock up capital for long periods of time in order to fulfill their investment thesis.
2. Valuation complexities
For many evergreen funds, monthly or even daily net asset value calculations are required. This can create an issue, considering many of the underlying investments are illiquid and infrequently priced. It can cause concern among investors about whether the fund valuations are accurate.
3. Fees
Both the management and performance fees are usually based on net asset value rather than committed capital, which can ultimately create a higher fee burden for investors. Also, once money is allocated for an evergreen fund, management and performance fees could be perpetual and there is no deadline or incentive for returning money to investors.
4. Liquidity
Evergreen funds offer the ability to redeem periodically over the course of year. This might at first seem beneficial to limited partners, but when investors all seek to redeem from a product, an evergreen fund could put up a redemption gate, limiting the amount of investor withdrawals from a strategy. There have been numerous examples where it has taken years to receive capital back from some evergreen funds due to large redemption requests.
The ability to invest in private markets has been enhanced through the growth of evergreen structures. Assets classes like private equity, private debt, real estate, and infrastructure were generally not accessible to the average investor, due to their high minimum investment requirements or the need to be a qualified purchaser, which demands that an individual or institution have investable assets of at least $25 million. Evergreen strategies have changed these guidelines and allowed greater participation into the highly regarded private marketplace. Before making an allocation utilizing an evergreen fund, however, it is essential to recognize and anticipate issues that could arise. Drawdown vehicles could still act as a viable solution, especially for reputable general partners who feel it is necessary to lock up capital for the long-term to generate robust returns. The private market landscape has evolved tremendously, and it is exciting that evergreen options are available to meet the growing demand in this space.
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Figure 1: Yearly launches of private market evergreen structures [2]
Figure 2: Perpetual capital ($B) and share of total Assets Under Management (AUM) by manager [3]
