How evergreen funds are changing the game for private equity investors

Private equity has historically only been made available to large institutional investors via closed-end fund structures tailored to their expertise and set-up. However, growing interest in this asset class from non-institutional investors with different resources and preferences has led to the emergence of open-end structures, which have become increasingly popular in recent years.

These open-end funds, also known as evergreen funds, have revolutionised the private markets landscape, finally granting long-overdue access to a wider range of investors keen to make long-term investments in private companies, while still maintaining flexibility and control.

Evergreen funds offer a specific advantage due to the absence of a “fixed term” or “end date”, as well as less restrictive entry requirements. With lower minimum initial commitments and the possibility to subscribe to the fund on a periodic basis, these funds become accessible to a broader group of investors who may not have been able to access traditional private equity funds with more rigid and fixed subscription periods.

The structure of these funds also allows for immediate exposure to private companies from Day 1 and the ability to maintain a consistent target allocation to the asset class. Unlike closed-end funds, which gradually invest commitments over the investment period (typically the first 5 years of the fund term), evergreen funds enable investors to fully deploy their capital immediately. This allows investors to start benefiting from a portfolio that is already known at the time of investment without any delay.

Evergreens’ periodic liquidity windows, offered by the possibility to redeem to the fund on a periodic basis, allow investors to adjust their allocations should they wish to do so. These liquidity windows enable them to access their capital with more flexibility compared to traditional private equity funds. Investments made in closed-end funds are typically locked in for the duration of the fund term (typically 10-12 years), and distributions are made over the life of the fund progressively when the underlying investments are sold.

Because evergreen funds are fully called from Day 1, the entire committed amount is invested right away. Not only is the capital put to work immediately, but distributions are also reinvested with the same target annual return, allowing investors to enjoy the full compounding effects of their investments managed by an expert team.

For illustrative purposes, as reflected in the first chart, closed-end funds typically use the Internal Rate of Return (IRR) metric that only considers the returns on the actual invested amount (dark green portion), which is often a fraction of the committed amount. Commitments that are not yet invested (light grey portion) remain with the investor as cash and will be invested at a different IRR depending on their liquidity management and expertise.

In contrast, the second chart shows that evergreen funds use the annual returns metric, which is based on the amount fully called on Day 1.

For illustrative purpose only. Note that these metrics are calculated on different bases (100% mark for evergreen vs. dark green portion for closed-end funds) and cannot be directly compared.

Evergreen funds eliminate the need for tasks such as active management of unfunded liabilities through capital calls and reinvestment of distributions. This ease of administration makes evergreen funds particularly appropriate for investors who may not have the resources to actively manage their investments. Moreover, by investing in evergreen funds, investors can benefit from the cash management and operational expertise of the fund managers, further enhancing the potential returns on their investments.

Given the current situation marked by market volatility, investors now assign greater importance to liquidity and flexibility in managing their portfolios. Evergreen funds have changed the game for private equity by granting these characteristics, while at the same time allowing the possibility for a highly efficient “invest and forget” approach.

At Carmignac, we strongly believe in the role that evergreen funds play in allowing our clients to benefit from the attractive opportunities that private equity has to offer. We are proud to have launched an all-in-one private equity solution aiming to grant access to quality deals while mitigating the historical challenges of this asset class.