Evergreen funds can democratize private markets

Over the past several years, there has been a notable uptick in allocations to private markets as investors increasingly recognize the advantages of incorporating alternatives into their portfolios. The potential for greater diversification and higher relative and absolute returns can be found when investing in asset classes such as private equity and private debt. However, not all investors, whether institutional or retail, have access to these asset classes through traditional fund structures.

Recent developments in evergreen funds have broadened access to private market investments, offering structural options to investors.

What is an Evergreen Fund? An evergreen fund is a perpetually offered investment vehicle that is fully funded at the outset and does not require subsequent capital calls. For private equity, once a portfolio company exits, the proceeds are reinvested as opposed to being distributed to investors. Similarly, with private debt, once a company repays its borrowed principal, this capital is recycled and lent to another company. With private debt, while the principal is recycled, investors do generally receive distributions of their contractual cash interest payments. Evergreen funds are open-ended, semi-liquid, have no fixed termination date, and allow for periodic redemptions and subscriptions.1

Key benefits of investing in evergreen fund structures

1. Immediate and flexible capital deployment. These vehicles deploy capital immediately, offering investors the flexibility to gain exposure at their discretion. They can reallocate at permitted times of their choosing and not just when managers make distributions, thereby putting liquidity decisions in the hands of investors rather than fund managers.  
2. Continuous compounding of returns. Evergreen funds, once past the ramp-up period, provide access to a fully invested, visible portfolio with continuous reinvestment of realizations into new investment opportunities, providing for the compounding of returns. This allows investors to maintain a consistent targeted investment level more easily with indefinite exposure.  
3. Ease of use for investors. Evergreen vehicles can offer a simplified structure with fewer operational burdens when compared to traditional draw-down funds, which often can result in investors adopting an “overcommitment plan” across multiple closed-end funds to reach their desired level of exposure. With evergreen vehicles, commitment plans and external cash management programs to fund future capital calls are unnecessary, as these processes are internal to the vehicles. Periodic rebalancing by the investor through tenders or redemption features reduces the risk of being over- or underweight on target allocations. Administrative burdens and pain points associated with managing a private markets program can be minimized by eliminating the re-ups, re-investment risk, and re-evaluation processes that are required with investments in new fund structures every few years.
4. Potential for periodic liquidity. While private markets investments are illiquid, evergreen funds are semi-liquid and allow for subscriptions or redemptions, often on a monthly or quarterly basis.  

Considerations for new investors

As part of the education process, it is imperative for new evergreen fund investors to understand the unique skill set required to manage a strategy efficiently through this fund structure. Due to these funds’ complexity, we believe working with professionals who have deep expertise in managing evergreen funds is important. Investors should seek managers who understand the strategies that are most appropriate for an evergreen fund, as not all strategies are suitable for this type of vehicle.

We believe managers with robust and consistent deal flow, highly selective investment-by-investment portfolio construction that allows for fee efficiency, and strong capital deployment capabilities are essential to maintaining the full investment levels required to manage a perpetual fund appropriately.

These factors, along with whether an evergreen structure and/or closed-ended structure are suitable to meet an investor’s needs, should all be considered when developing an optimal private-markets program.

Conclusion

At Neuberger Berman, we believe evergreen funds can serve as part of an investor’s core private markets allocation or as a complement to traditional private market programs. Whether a pension fund seeking stable and ongoing investment opportunities, an endowment or foundation with annual disbursement quotas, or a high-net-worth individual or family office targeting generational wealth preservation, evergreen structures can offer flexibility and alignment to help achieve investors’ varied objectives while allowing access to private markets for all.  

Joyce Hum is relationship manager – consultant relations at Neuberger Berman, an employee-owned, private, independent global investment manager founded in 1939.