Sam Metland discusses the complexities of evergreen funds in The Drawdown
27 March 2025 - Evergreen funds have become an increasingly popular option for fund managers in recent years amid a shift in demand for exposure to both public and private markets.
Evergreens aim to blend the best of both private and public investment worlds. These innovative investment vehicles are bridging the gap between the two, allowing a broader range of investors to access the historically high returns of private investments alongside traditional markets.
Demand is coming from HNWs, family offices and private banks who want access to private assets via structures that provide liquidity. In turn, Evergreens have started to be used to create products to meet that need, with industry commentators predicting that portfolios may have up to 50% invested in private assets in future.1
The future looks bright for Evergreen structures
Over the past three decades – with a notable uptick since the 2008/09 financial crisis – private markets have generally outperformed traditional public markets, attracting significant investor interest. As more and more money pivots towards private markets, structures like Evergreen funds have become increasingly popular.
At their core, Evergreen funds typically exhibit two defining features. First, they invest in illiquid private assets such as infrastructure, real estate, or private equity, while also allocating a portion of their capital to liquid, public-market securities. This mix allows them to offer a degree of liquidity not traditionally available in private-market investments. Secondly, these funds provide more frequent redemption options through "liquidity windows," enabling investors to withdraw their capital more readily than in conventional private funds.
One of the most compelling aspects of Evergreen funds is their ability to maintain capital deployment and efficiently reinvest cash, surpassing the capabilities of traditional closed-end structures. This unique feature enables Evergreen funds to harness the power of compounding more effectively, potentially leading to enhanced returns over time.
But this does not mean that the structure is simple – the creation and operation of Evergreens has added complexity, particularly around the management of cash to meet liquidity needs. Even within the realm of Evergreens, there are multiple categories with different use cases. Limited liquidity Evergreens, for example, may be more suitable for income-generating assets – such as private debt – whereas run-off class Evergreens may work better for private equity.
Evergreens can also be used as an additional source of capital for an investment strategy that is already successful, rather than to fully fund a particular investment approach. With many different Evergreen structures available to managers, careful thought and consultation, as well as an assessment of the operational support needed to run them, are key decisions.
Industry pain points around Evergreens
While they have a number of advantages, one of the primary concerns for managers either operating or considering launching these funds is the complexity of structuring and managing them.
Balancing the liquidity needs of investors with the inherently illiquid nature of many private assets requires sophisticated risk management practices. Fund administrators can play a crucial role here, offering expertise in liquidity management and risk assessment to help funds maintain a healthy balance.
Valuation presents yet another challenge. While public securities have readily available market prices, private assets often lack a clear market value. This necessitates specialized valuation techniques, adding complexity to fund management. Fund administrators with expertise in both public and private market valuations can provide invaluable support in this area, ensuring accurate and timely valuations that meet investor expectations.
Transparency is a crucial factor to consider in the context of Evergreen funds. Due to their hybrid nature, these funds face heightened expectations for disclosure with investors who are accustomed to greater visibility in traditional investment vehicles. Moreover, investors who have primarily focused on public funds, and are now venturing into private funds, typically expect more frequent and timely reporting.
With that in mind, over the past year, we've observed a growing trend among our clients around the demand for compressed reporting timelines. This increased pressure from investors for faster, more efficient reporting has become a significant priority for fund managers. To address this challenge, it's crucial for funds to collaborate with service providers that offer solutions designed to facilitate prompt and comprehensive reporting.
By partnering with the servicer, funds can better meet investor expectations for transparency and timeliness, ultimately enhancing their relationships with stakeholders and improving overall fund performance.
Whilst concerns remain among investors about the lag between redeeming and receiving their cash, the positives around Evergreens are prevalent. The compounding effect, famously described by Albert Einstein as "the eighth wonder of the world: he who understands it, earns it; he who doesn't, pays it." is at the heart of Evergreen funds' appeal, making them a formidable instrument for achieving long-term growth.
The growing popularity of Evergreen funds reflect a broader trend of traditional fund managers expanding their private market offerings to meet investor demand. As this trend continues, it is pivotal to ensure managers are equipped with the expertise and infrastructure necessary to navigate the operational complexities of Evergreen funds.
Evergreen funds undoubtedly represent a significant evolution in the funds industry, offering new opportunities for investors to access private markets. However, the success of these funds will depend on the ability of fund managers to effectively navigate their unique challenges. By partnering with knowledgeable fund administrators, managers can ensure they are well-equipped to capitalize on this new frontier in investment management.
This article was originally published in Private Funds CFO.
1 Funds Europe Evergreens Report, https://funds-europe.com/research-report-explores-the-rising-popularity-of-evergreen-funds/