What is an evergreen fund?

An evergreen fund is a specialised investment vehicle with no set maturity date or fixed investment period. Unlike traditional closed-end funds that liquidate and return capital to investors upon maturity, evergreen funds continuously reinvest profits and accept new investors, keeping the manager in a perpetual fundraising mode. The term “evergreen” signifies the fund's perpetual activity, akin to the enduring leaves of an evergreen tree.

Evergreen funds come in various forms, from NAV-based open-ended structures to hybrid vehicles that blend features of both closed- and open-ended funds. Additionally, there are vintage structures that emulate closed-ended fund concepts but allow investors to roll over from one vintage to the next without requiring a new commitment.

Why are we seeing more and more evergreen funds?

Managers across private capital markets are increasingly offering evergreen funds due to their benefits for both limited partners (LPs) and general partners (GPs).

The primary appeal of evergreen funds for investors is their enhanced liquidity options. These funds provide additional investment and redemption rights, allowing investors to manage cash flows more efficiently compared to traditional commitment/drawdown/distribution models. This flexibility simplifies pacing and allocation decisions and reduces potential cash drag by keeping capital fully invested at all times. Ultimately, the ability to add and withdraw capital without a 10-to-12-year lockup is a key driver for investor interest in evergreen funds.

For investors who choose to reinvest disbursements or principal, evergreen funds enable generated income to be applied to new or existing investments, which is particularly beneficial for yield-focused strategies such as private credit or real estate. This continuous reinvestment helps investors maintain allocation targets and stay fully invested without the need to underwrite and conduct due diligence on new funds.

On the GP side, evergreen funds present a compelling opportunity to raise capital outside the traditional fundraising cycle and broaden the investor base. By eliminating the multiyear lockup of traditional closed-end funds, managers can access a wider range of investible assets and appeal to investors with existing liquidity constraints. Additionally, as private capital managers target the high-net-worth individual (HNWI) market, evergreen funds become an attractive option for those uncomfortable with long-term lockups.

Evergreen funds also allow managers to better manage “end-of-term” investments and avoid the challenges of forced exits at a fund’s conclusion. While side pockets and continuation funds are alternatives, they require LP approval and involve additional costs and effort. Evergreen fund structures provide managers with the flexibility to make new or add-on deployments as opportunities arise, free from the constraints of fixed time limits.

What are the main challenges for evergreen funds?

Managing an evergreen fund requires a significant enhancement in operational capabilities for a GP. Offering a more liquid, perpetual fund adds multiple layers of complexity across the entire firm, affecting both the back office and the investor relations team.

Key areas such as NAV calculations, onboarding, KYC/AML compliance, redemptions, investment performance calculations, fee and carried interest calculations, reporting, and money transfers all become more complex with the introduction of more liquid options. This complexity is even greater if the fund is offered to the non-institutional market.

The increase in transactions, NAV calculations, and reporting elevates the risk of errors. Therefore, the importance of establishing proper controls, workflows, and automation cannot be overstated.

What is the future outlook for evergreen funds?

We anticipate the launch of more evergreen funds as an alternative to traditional closed-ended funds, particularly in line with the democratization trend.

However, only larger GPs will have the operational infrastructure required to manage the complex and intensive processes associated with these structures.

While US GPs are currently leading in the adoption of evergreen funds, we expect European GPs to follow suit soon.