Navigating the evergreen fund frenzy

Private markets investing has undergone several evolutions over the past decades, adjusting to developments in the macroeconomic and business landscape. However, the way investors have accessed private markets investments has remained largely unchanged.



The traditional closed-end fund, a structure popularized in the 1980s, still represents the majority of the industry’s assets under management (AUM). While these structures have served institutional investors well, the same cannot be said about retail investors and the private wealth segment.

Such individual investors are responsible for only 16% of alternative investments, despite controlling half of total global AUM. ¹ Furthermore, within their overall allocations, just a 5-6% ² share is dedicated to private markets – compared to 24% ³ for institutional investors. This imbalance has fuelled a growing demand for a type of structure that better serves individual investors – the "evergreen", or "open-end", fund structure.

Evergreens work as perpetual capital funds, where investors can subscribe into and redeem out of over time, without otherwise having to wait for the vehicle's termination. The liquidity feature of this structure, as well as the typically lower minimum investment requirement, better caters for the needs of individual investors.(See section 3 for differences between closed-end and evergreen structures.)

Partners Group pioneered evergreen funds more than 20 years ago, and we are a firm believer in their potential to democratize private markets. In recent years, several other market participants have started echoing this viewpoint, resulting in a record number of new evergreen funds launched. In most cases, these funds represent each manager's first foray into this space, making it difficult for investors to assess their ability to successfully run such offerings.

Evergreen fund launches globally

Note: Includes Private Equity and Private Markets evergreen funds launched since 2000.
Source: Partners Group research (2024). For illustrative purposes only.

In this third paper of our Private Markets MythBusters Series, we use our experience to highlight the factors we believe make a successful evergreen fund – capable of delivering attractive returns over the long-term.

By doing this we seek to dismiss the misconception that these structures can be simple adaptations of traditional closed-end strategies. In reality, a successful manager in closed-end funds may not be able to replicate such results in the evergreen space. Most importantly, we intend to equip investors with a playbook that can help them successfully conduct their due diligence and hold managers accountable for their processes and performance.

Looking under the hood

Our approach to assess today's expanding evergreen universe is based on all our learnings over time in the space. In this paper, we break them down into five key elements that we believe make a successful evergreen fund and explain how investors can assess a manager's ability to deliver on them.

In private markets, direct investments refer to transactions in which a manager (acting on behalf of its clients) invests in a company or asset without intermediation. This is in contrast to fund investments, whereby a manager commits capital to a fund managed by a third-party, which typically only deploys the capital over the following three to five years. We believe an evergreen fund should focus on direct investments, because:

• Direct investments are fully drawn, with 90-100% of the committed amounts paid in at the time of investment. Conversely, capital committed to a fund is not deployed at the outset but only gradually – which creates an enormous uncertainty over the timing of cash flows. In practice, it can burden an evergreen fund with being "on the hook" for future capital calls. This can force a manager to either keep large cash reserves on hand, or risk running out of liquidity via an overcommitment strategy.
• Direct investments provide more flexibility, not only to control the pace of deployment, but also to quickly pivot investment focus toward opportunities presented by the market in real-time. Fund investments, in contrast, reduce this ability for two reasons; firstly, there is no guarantee that a suitable fund would be available when a manager wishes to increase exposure to a certain strategy. Secondly, the evergreen fund would be tied to its previous fund commitments, even if the manager's views have changed in the meantime.

To illustrate this point, we use the example below in which two different evergreen fund managers – one running a directs-focused approach, the other concentrated on fund investments – seek to take advantage of three available investment strategies.

We assume that:

• Strategy 1 is attractive in year 1 but loses its appeal thereafter
• Strategy 2 is very attractive in years 2 and 4
• Strategy 3 is the most attractive in year 3

The charts on the right show how each manager could deploy capital each year, in reaction to such developments.

The same limitations shown in this example are true of evergreen managers who commit to their own internal closed-end funds. While this could somewhat improve the visibility around the timing of future cash needs (compared to third-party funds), it has the same portfolio construction limitations with respect to liquidity and flexibility. Therefore, it is not an adequate substitute to allocations made straight into direct investments.

The capital required to support an evergreen's ongoing investment activity is sourced from a combination of new investor subscriptions (inflows) and the proceeds from selling past investments (exits).

As evergreen funds can accept inflows on an ongoing basis, a manager might be tempted to capitalize on the current momentum around evergreens by fundraising as much as possible. However, maximizing 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 highly concentrated fund.

Based on our experience, a more disciplined approach to growth can pave the way to a more diversified portfolio – achieving a healthy balance between younger and mature assets. That is because: