Evergreen vehicles can be a valuable approach to targeting the wealth channel

Private equity investing has often been limited to the very upper end of the wealth spectrum due to regulations which only allow qualified purchasers to invest directly into traditional, closed-end drawdown funds.

However, the market for evergreen private market funds has evolved dramatically over the last several years. These fund vehicles are designed for individual investors and are narrowing the gap in both quality and cost compared with the investment options available to the ultra-high-net-worth and institutional investors.

The evergreen structure is designed to provide consistent private market exposure through a single investment. Minimum investments can be as low as $5,000 and the individual investor isn’t subject to any capital calls throughout the life of the investment. In other words, the money gets put to work immediately into an existing portfolio of private investments. Additionally, tax reporting is provided through a Form 1099, rather than the more complicated Schedule K-1 typically associated with private equity.

Structural advantages for both investor and fund manager

In an asset class where the wealth channel is a growing contributor of capital formation activity, it’s paramount to realize the role and advantages of evergreen vehicles.

A distinguishing feature of evergreen funds is the immediate exposure and automatic reinvestment of distributions. Capital is invested on day one into an NAV vehicle 80–90% deployed in existing private markets investments. Investors don’t have to manage capital calls and are invested over a longer time.

In other words, compounding returns starts at once for evergreen funds, leading to a higher cumulative return. For example, the cumulative value of $100 in an evergreen private equity fund over ten years amounts to $314, versus $250 for a drawdown fund due to full allocation over the life of the fund.¹

Evergreen funds also alleviate a need for constant cash management (continuous investment without capital calls) and have semi-liquid attributes (most funds offer quarterly liquidity of up to 5% of NAV), providing considerable convenience and efficiency benefits.

The surge in the use of evergreen funds also offers benefits for fund managers: they enable a continuous capital-raising process and permanent capital. Because investor capital in an evergreen vehicle is sticky, managers can use it to strengthen their businesses and grow their distributions and investor bases.

Is this a win-win? It’s hard to say. But the more predictable fee revenue, as opposed to unpredictable carried interest, can provide more reliable revenue growth for managers while providing investors immediate exposure and consistent availability while mitigating the impacts of a J-curve.

More information available at: icapital.com/insights

_{1 Assumptions include an 85:15 private equity/liquidity sleeve ratio, liquidity sleeve return of 5%, net IRR of 13.5% for the private equity allocation.}

_{This article originally appeared in Fundraising from Private Wealth 2024: A Guide to Raising Capital. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and iCapital accept no liability for any decisions taken in relation to the above.}