Rolling on: The growing popularity of evergreen funds

Evergreen funds are experiencing a growth in popularity thanks to their flexibility, liquidity and resilience to market conditions.

By Penelope Rance

6 minute read time

According to reporting by Private Debt Investor, by late 2024 the number of ‘evergreen’ private credit funds had increased by over 30% in two years, representing around $350bn in global assets across 520 funds.

“Most large private debt managers are considering an evergreen product, with several in the process of launching one,” says Samuel Brooks, Partner at Macfarlanes. “Open-end structures are commonplace for real assets funds, and we envisage that institutional evergreen funds of funds may be launched, following the same path as private debt funds.”

“Factors driving the popularity of evergreen funds include the ability to access illiquid asset classes through a liquid vehicle, enhanced flexibility in managing allocations to alternative investments, and improved operational efficiency,” adds Brennan Schol, Product Strategy Director at Hayfin.

Evergreen funds operate indefinitely, in direct contrast to typical, unlisted closed-ended funds with finite investment and fundraising periods. They provide sponsors with more permanent capital, and investors with more liquidity potential. “In a market suffering a slowdown in distributions, evergreen funds give investors the option to redeem or run-off their commitment without having to trade in the secondary market at a potential discount,” explains Parin Avari, Director, Institutional Banking at RBS International.

Evergreen funds are also less at the mercy of market cycles. “As fundraising is perpetual, the impact of a one- or two-year slowdown is less harmful,” says Adrien Timmermans, Investment Funds Counsel for Linklaters. “The fund can rely on prior fundraising and also continue to fundraise.”

Evergreen fund structures

The evergreen principle is not new, but more innovative structures are coming to market. “Different fund types are characterisable as ‘evergreen’, ranging from semi-liquid funds aimed at non-professional investors, through perpetual institutional vehicles, structured on the basis of a ‘NAV-in, runoff-out’ investor liquidity model, to rolling vintage funds,” explains Samuel.

The vintage model operates in a similar manner to a closed-ended fund, but with an indefinite term instead of a fixed life. The fund comprises multiple vintages, each with its own investment period. “Each vintage is treated as a ‘segregated series’ and operates within a larger fund structure. Investors’ uncalled commitments or capital proceeds are automatically rolled or recycled into future vintages, unless they elect to run off following an initial lock-in period,” says Parin.

An alternative open-end model redeems at NAV. “You don’t have any specific vintages, instead, investors have exposure to all the fund’s assets. Redemptions are processed at the NAV per interest of the fund for investors who have submitted a redemption request. The time required to fulfil a redemption varies based on the fund’s liquidity and redemption terms” says Adrien.

Another new trend in the debt space is the runoff model. “To satisfy a redemption, a separate share class is created containing an investor’s portion of assets and liabilities as of the request date. This share class goes into runoff, meaning the investor no longer has exposure to new investments made after the allocation. The runoff class is simply liquidated and reimbursed over time” outlines Adrien.

Appeal to investors

“Investors appreciate the flexibility which allows them to enter and exit evergreen funds, often during redemption windows. Given the slowdown in exit markets over the last 2 years, access to liquidity has been viewed favourably by investors,” says Parin.

Evergreen funds are also particularly appealing for High Net Worth (HNW) investors, a growing target client base for fund managers as private markets become increasingly democratised, says Parin. “Evergreen funds are lowering entry barriers and are beneficial for HNW investors who may need more flexibility to access their capital than institutional investors.”

Evergreen funds also mean less time-consuming investor admin. Due diligence processes are more efficient, without repeated KYC processes. Investors don’t need to make re-up decisions, as proceeds roll into the next vintage until they choose to run off. “Evergreen structures’ longer tenure also contributes to fostering longer-term strategic relationships between fund manager and investor,” says Brennan.

Institutional investors, meanwhile, favour structures that allow them to maintain a pure exposure to the asset class. “They generally don’t have immediate liquidity needs but see value in managing their long-term allocation more flexibly and reducing the operational burden related to reupping from one closed-end fund to the next,” says Brennan.

Benefits for fund managers

“Evergreen structures can be an effective tool for fund managers to access capital from investors who have historically been underexposed to alternatives”, says Brennan. “They provide an opportunity to differentiate from competitors – especially if managers structure their offerings thoughtfully, addressing pain points tied to investing in closed-end structures.”

Evergreen capital is more permanent and pressure to liquidate assets at a certain point in time is also removed. “Rather than requiring periodic fundraising, evergreen funds provide a continuous pool of capital, reducing the pressure to raise new funds every few years. Moreover, Managers can hold investments for as long as needed, avoiding forced exits due to a fixed fund lifecycle,” says Parin.

Fund managers can also keep going to the market to increase investment, benefiting from uplifts and boosting investor interest with good fund performance. “It enables more frequent – ideally perpetual – fundraising,” says Samuel. “Avoiding ramp-periods between separate fund vintages is another advantage.”

Key considerations

To enjoy these benefits, fund managers need to manage the potential pitfalls. “Evergreen structures are operationally more complex than closed-end funds, as they require significant oversight both in terms of portfolio management and fund operations,” warns Brennan.

In a relatively nascent market for evergreen products in alternatives, managers need their value proposition to attract sufficient capital to make their funds cost-efficient. “They must also ensure there cannot be a mismatch between investor liquidity and the underlying portfolio liquidity,” adds Samuel.

Fund managers should also consider how they structure redemptions. Reflecting on key questions such as:

When an investor chooses to redeem, is the fund obliged to meet that request?
Or can the investor’s position be put into runoff to avoid escalating asset sales?
In a rolling vintage, if an investor redeems part of an investment, how is the core capital commitment treated?
What are the equalisation mechanics between investors?
Is there a drawdown queue?
Is interest issued at NAV?

“Each evergreen fund is different and therefore there is no ‘one size fits all’ approach. Detailed diligence is essential when structuring subscription facilities or NAV lines given the nuances with each fund structure”, says Parin.

To avoid triggering a liquidity event, redemption caps and a run-off schedule should be established. “Evergreen funds offering redemption gates need to ensure they can meet the liquidity requirements. Providing more liquidity than the target asset class can support may force the sale of illiquid assets, impacting the returns of investors who remain in the fund,” says Brennan.

When assets are realised, proceeds need to be reinvested or returned to investors. “Managers need to make sure they’re not sitting on large pools of capital for a prolonged period, causing a drag on returns for the fund,” says Parin. “There need to be sufficient investments being made to deploy that capital while balancing continuous fundraising.”

Evergreen funds can also have higher ongoing costs, as a result of additional regulatory requirements, operational complexity, a greater number of valuations and reporting, ongoing portfolio reviews, and managing subscriptions and redemptions, says Adrien. “And it is more difficult to re-open the fund documents to change the terms,” he adds. “This makes it difficult to quickly adapt to new market conditions.”

Will evergreen funds prove everlasting?

As investors seek greater flexibility, evergreen options look set to become a fixture within the alternative investing space. With more fund managers incorporating evergreen solutions into their investment offerings, a growing number of investors are likely to invest through evergreen formats.

Concludes Parin: “Evergreen solutions are here to stay, offered by fund managers alongside the more traditional fund structures. Watching how they evolve into the alternative investment space will be interesting.”

Please reach out to your relationship team if you wish to discuss any of the topics covered here further.

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Rolling on: The growing popularity of evergreen funds

By Penelope Rance

6 minute read time

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