Assessing evergreen funds: an investor’s guide

In recent years, the industry has recognised evergreens as a key part of the landscape and numerous evergreen funds have been launched. In this article, we aim to provide investors with an overview of characteristics that a great evergreen must have.

Focus on direct investments: limiting the role of fund building blocks

In private markets, direct investments involve a manager investing in a company or asset without intermediation, while fund investments involve committing capital to a fund managed by a third party. We believe evergreen funds should prioritise direct investments because they are fully drawn and offer more flexibility - ultimately allowing for greater control over deployment pace and the ability to pivot investment focus in response to real-time market opportunities. In contrast, capital committed to a fund is deployed gradually, creating uncertainty over cash flow timing and requiring extra cash on hand. Direct investments can be supplemented by a flexible allocation to secondaries. This can help stabilise deployment over time, in particular during market turbulences when direct transaction activity declines and allow managers to take advantage of market dislocations through discounted opportunities. However, investors should be cautious of evergreen funds that are heavily reliant on secondary transactions undertaken at deep discounts (30-50%+). In such cases, most of the investment’s potential is often used up (written up to NAV) on Day 1, rather than developed over time, which tends to be unsustainable.

Access to the right investment platform

As perpetual investment vehicles, evergreen funds must consistently invest in new transactions to maintain attractive investment levels, requiring a strong, constant investment pipeline for diversification and steady deployment. If this is not the case, an evergreen fund risks being underinvested or overly concentrated. Furthermore, it is crucial for evergreen funds to have equal access to investment opportunities as other offerings from a manager. Unfortunately, many managers favour their flagship closed-end funds over their evergreen equivalent, putting the latter at a disadvantage. This « Waterfall » approach, where the evergreen fund is deprioritised, is not in the best interest of its investors. Therefore, we strongly advocate for a strict pro-rata allocation policy, ensuring equal access for all clients.

Disciplined growth: the key to long-term success

As evergreen funds can accept inflows on an ongoing basis, a manager might be tempted to capitalise on momentum by fundraising as much as possible. However, maximising fundraising at any cost can create portfolio imbalances. For instance, by accepting disproportionately large inflows, a manager may be forced to make significant near- term investments to remain fully deployed – thereby creating a concentration risk. A more disciplined approach to growth can pave the way to a more diversified portfolio – achieving a healthy balance between younger and mature assets. Striking this balance has a clear impact on a fund’s ability to deliver liquidity and returns. This can only be achieved through a combination of disciplined fundraising and careful investment sizing over time.

Valuation assessments: more accurate and frequent

Valuing private markets investments is increasingly in focus because market participants differ in their valuation approach, particularly when it comes to frequency and reflecting public market fluctuations. Managers of closed-end funds typically conduct quarterly valuations, while evergreen funds offer monthly unit prices for investor subscription and redemption. It is crucial for investment valuations to accurately reflect the health of underlying assets and the market environment. If an evergreen fund is not perceived to be accurately valued, investors may be incentivised to redeem or subscribe based on their assessment, potentially leading to arbitrage opportunities to the detriment of existing unitholders. Therefore, managers offering evergreen funds must have a robust valuation process in place, be able to consider real-time valuation-relevant events and make appropriate adjustments.

Liquidity management: the moment of truth

Liquidity is the lifeblood of any evergreen fund and managing it requires dedicated resources. These funds offer liquidity through gates or redemption queues, making it crucial for investors to trust the manager’s portfolio construction, as the way capital has been invested determines the fund’s ability to service redemptions. Only during market stress will it become clear which managers have strong processes in place. Managers must stringently stress test their portfolios under various scenarios and be able to demonstrate their ability to generate sufficient liquidity during prolonged (12+ months) and severe stress while minimising negative portfolio impacts - where the challenge lies in avoiding fire sales and carefully steering liquidity according to previous communication. Experience shows that only few managers can successfully manage liquidity during times of significant stress and volatility.

In conclusion, we view the increasing interest in evergreen funds as a positive development for private markets investors. We trust that managers with credible means, on the investment side but importantly also on the operational side, to address these topics will be capable, and indeed best positioned, to deliver attractive and sustainable long-term performance. We hope this article serves as a valuable resource for investors, empowering them to make informed decisions and hold evergreen managers to high standards. By asking the right questions, we believe investors can embark on a successful and enduring evergreen investment journey.

Markus Pimpl, Managing Director, Co-Head Private Wealth Europe, Senior Member of Management, Partners Group