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A Brief Guide to Evergreen Funds

With no set life span and the ability to raise capital at will, evergreen funds are increasingly popular. But they’re not an easy win.

The typical life span of a traditional private equity fund can be up to 10 or 12 years. This long-term approach gives investment managers a prolonged period in which to increase the value of portfolio assets.

The one major disadvantage of these closed-end funds is their inflexible timeline, having to close on a predetermined date, regardless of the state of the market or macroeconomic climate. Even though it might not be the best time to sell portfolio assets, they must be sold anyway.

This limitation partly explains the growing popularity of the evergreen fund, a vehicle that shares many qualities with a traditional private equity fund but with an indefinite life span. As the name suggests, evergreens keep going without a set end date—or with a very distant one—and with the ability to raise funds and repay investors throughout the life cycle.

There are good reasons to develop an evergreen fund as part of a wider strategy as well as some pitfalls to look out for. In this Q&A we’ll explore evergreen funds in more depth.

What is an evergreen fund?

An evergreen fund is typically an open-ended fund. It has no set termination date and can continuously accept new investors and capital. Investors can also redeem capital at regular intervals, assuming certain parameters are met. Managers sell investments when they consider it to be the right time, rather than when forced to do so by the fund’s ticking clock.

Why are evergreen funds growing in popularity?

Private capital is an increasingly competitive space, and meeting fundraising targets has become more difficult in the last few years. At the same time, in a flatter market, more managers are having to sell assets at a discount as fund termination dates approach or launch continuation funds.

Evergreen funds go some way to solving both these challenges. Investors can enter and exit the fund periodically, so the pressure to raise capital at the beginning of the fund life cycle is reduced. And as there is no fund termination date (or an extremely distant one in some cases), managers can choose to ride out periods of market volatility and sell portfolio assets at what they regard as the optimum time.

What’s the evergreen fund process?

Managers raise a pool of capital from investors without defining the life span of the fund or investment and divestment periods. They invest and divest at times they consider optimal, recycling returns into new assets. New investors and capital can be added whenever the need arises.

Investors benefit from redemption windows when they can sell their holdings back to the fund. This typically operates like a secondary market, with new investors buying out those looking to exit the fund.

The benefits are clear: managers get flexibility of action, with the choice to invest and divest at the most opportune times, and less pressure on fundraising.

Meanwhile, investors get access to a long-term private fund with better liquidity options and often lower access requirements, because of the ability to continually raise capital, potentially opening private markets to a larger investor pool.

What are the challenges of evergreen funds?

Evergreen funds present a number of challenges for managers. For example, investors buy into the fund or cash out, based on the value of portfolio assets. In an open-ended public fund, net asset value is simpler to calculate. In a private fund, it is far more obscure. Nevertheless, frequent and accurate value calculations are crucial to the smooth running of an evergreen fund.

In addition, the administration of evergreen funds is often complex. Liquidity and redemption rules need to be carefully formulated and applied. When investors add or redeem investments, the fund allocations will need to be rebalanced, an administrative task not often performed by closed-end fund managers. Further, clauses may be required to protect the liquidity of the fund, but these should be balanced against the liquidity requirements of investors. The differing needs of an ever-changing investor base must be met.

In other words, evergreen funds are a useful tool for GPs looking for a flexible, open-ended private market strategy, but their management and administration require careful consideration.

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