Evergreen Funds Reshape Private Markets with Flexibility and Liquidity Solutions
Managers are addressing liquidity issues in funds by adopting evergreen structures, which are reshaping private markets. These funds, popularized by firms like Charles Schwab and Fidelity, offer investors and sponsors more flexibility, but also present regulatory challenges and liquidity concerns.
Evergreen funds differ from traditional closed-end funds as they have an indefinite term and no fixed investment period. They allow managers to address liquidity challenges by structuring funds with less frequent redemptions and gates. This flexibility enables sponsors to focus more on dealmaking and raise additional capital post-closing.
Evergreen vehicles, like business development companies, could open private markets to wealth and retail investors. Private credit and assets with matching liquidity profiles are best suited for these structures. Strategies such as Private Credit, direct real estate investments, and leases (Pacht) are suitable. Private Credit and direct investments offer more flexible liquidity profiles, while real estate investments provide stable income but lower liquidity. The Carmignac Private Evergreen fund demonstrates that combining direct investments and a liquid component, hedged against currency risks, supports resilience and liquidity needs for such structures.
Investors can subscribe and exit over the duration of evergreen funds, providing more flexibility. However, they face concerns about liquidity risks and potential dilution. Side letters in these funds may include preferential redemption terms and performance allocation provisions, adding complexity to the investment process.
Evergreen funds are transforming private markets by offering investors and sponsors greater flexibility. However, they also present regulatory challenges, such as valuation concerns and conflicts of interest. As these funds gain traction, investors must carefully consider the liquidity risks and potential dilution they may face.
