How closed- and open-end fund managers are evolving to meet LP demands

Given the uncertain macroeconomic outlook, LPs are increasingly demanding liquidity, flexibility, and strong risk-adjusted returns. Closed- and open-end fund managers are responding with innovative fund structures, evolving fee terms, and investor-friendly strategies to meet these expectations. Key trends from Preqin data illustrate this shift:

1. Evergreen private credit funds have more than doubled in the last five years, from 141 in 2020 to 318 in July 2025.

2. A record 64 managers globally closed their first continuation fund in 2024, up 25% from the previous year.

3. Average hedge fund management fees were 1.38% as of September 2024, well below the traditional 2%.

Why are evergreen funds gaining popularity in private credit?

David: The rise of evergreen private credit funds reflects the maturation of the asset class. After the Global Financial Crisis, private credit funds adopted a closed-end private equity-style partnership out of necessity. However, as the market has evolved, a growing number of managers now believe that this is no longer necessary, as most credit assets are medium- or even short-term and relatively straightforward to value.

Evergreen funds are transforming the way private credit is managed and accessed. For managers, the model supports perpetual fundraising without the pressure to generate immediate liquidity. For investors, it offers greater control and flexibility – they can choose the duration of participation rather than committing to a fixed five-to-10-year term.

With private credit evergreen funds, liquidity is driven by the natural life of the underlying assets. Investors exiting the fund simply stop participating in new investments and receive their share of proceeds as loans are sold or repaid.

As more managers close their first continuation fund, what should they consider?

Joseph: Selecting the right portfolio companies for continuation funds is critical. GPs should focus on assets that have already created value and still have room for growth. Underperforming assets may be better sold later when interest rates decline and exit conditions improve. Incorporating weaker assets into a continuation fund prematurely could negatively affect the GP’s track record and investor confidence.

The integrity of valuation methodology is also critical. GPs must transact at a valuation that justifies carry crystallization, convincing LPs that they are getting not just a liquidity option but an attractive redemption value that could have been achieved in a third-party sale. Simultaneously, investors in the continuation fund must see future upside.

Engaging with a reputable placement agent can help structure these transactions and negotiate pricing.

How are hedge funds addressing investor concerns on fee alignment?

Peter: While hedge funds have moved away from the traditional 2/20 structure, investors continue to push for fee alignment. In response, there has been a continuation and even an increase in management fee step-downs in recent years.

To address investor concerns that management fees could become a profit center on their own, hedge fund managers are implementing management fee step-downs when fund AUM or individual investments reach certain thresholds. This ensures that fees do not become disproportionate as AUM grows.

Hedge funds are also increasingly adopting performance hurdles, aligning incentive fees with returns above risk-free alternatives. With the recent rise in the risk-free rate of return, investors are now questioning why they should pay incentive fees on fund returns that could be achieved through money market funds.

These hurdles can be tied to an index that correlates with the manager’s strategy or set as a hard number, often based on the risk-free rate of return. Some funds include a catch-up mechanism, ensuring both investors and managers share value creation fairly while maintaining alignment over time.

This article originally appeared in Service Providers in Private Markets 2025.

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_{This is a sponsored opinion by McDermott Will & Schulte. The views expressed are provided as of September 2025, do not constitute an endorsement, recommendation, or any other advice, and are subject to change. The following content does not necessarily reflect the views of BlackRock, Preqin, or any of its affiliates. McDermott Will & Schulte is not affiliated with Preqin. Preqin received compensation from McDermott Will & Schulte in exchange for publishing this content.}