Evergreens Gain Spotlight as Perpetuity Funds Seen Building for Wealth Channel

In perpetuity is a term not often considered part of the private-equity lexicon, but a certain type of fund that has been around for 20 years by some counts (much longer for the REIT market) is making headlines lately and gaining the attention of investment managers looking to attract the retail investor.

Enter the evergreen fund, not quite a “forever fund,” but an open-ended structure that provides GPs and LPs alike with flexibility and liquidity at a time when both are needed pretty badly.

This column is often focused on the transformation of the PE industry and evergreens fund are perfect illustrations of innovative structures that are being leveraged to broaden the make-up of the investor base.

That may be all good, but what’s the real attraction and how are these funds really different?

Well, It’s back to perpetual. Because it is not a closed end or a drawdown like with typical buyout funds, the flexible structure gives managers the ability to focus on long-term growth versus short-term performance. They can hold onto investments in good times and bad, when more time within a portfolio allows for even more growth or the time to emerge from sluggish growth.

What’s more, with an evergreen structure, GPs can raise money on an ongoing basis so in theory capital is available to deploy for investments, not set to a schedule. Think of it as fundraising on a rolling basis. Another plus: Investment managers can collect fees on a more regular cycle because the fundraising is continuous.

The flexibility goes beyond managers.  For the investor, evergreen funds carry lower investment requirements making them more attractive to the retail audience and offer liquidity options more frequently, often on a set quarterly basis. This provides redemptions on a more regular basis and addresses concerns about lack of liquidity for LPs we hear about so much in recent months. The lower entry requirements, however, can mean higher regulatory hurdles or administrative challenges, and time is still needed on how to structure products for the big prize: the mass affluent

Industry experts say that evergreen funds are one of the fastest-growing segments of the private markets with AUMs of approximately $427 billion at the end of last year (Pitchbook). These experts also say they expect wealth-focused evergreen funds to grow at an annual rate of 20 percent, hitting over $1 trillion dollars in four years.

Amid these positive projections, challenges do exist. An open-ended structure means redemptions are not predictable (when will investors want their money?) so valuations can be complex and constant. Administrative duties are more time consuming, and fee structures can also be complicated.

In perpetuity is by definition a very long time but clearly not as long as when these structures will become more common and part of the PE lexicon.

Mark Kollar
Partner, Prosek Partners

Mark Kollar’s monthly Letter from America can be read at The Alternative Investor.