Analysis
Private markets pioneers: a natural evolution – the growth of evergreen funds
Despite a slowdown in private markets fundraising, capital flows into evergreen fund structures are on the up
In the second of a five-part series, Alter Domus explores the reasons behind forecasts for double-digit growth in evergreen assets under management (AUM), and why institutional investors in particular are funneling more capital into evergreen fund structures.
Despite double-digit declines in annual private markets fundraising, the outlook for investment in evergreen fund structures is bright.
Evergreen funds (open-ended funds that do not have a fixed fund life, allowing investors to enter or exit at their discretion) have been around for decades, but have seen a surge in popularity during the last five years as investors have recognized the flexible liquidity and immediate market exposure they offer for alternative assets portfolios.
The momentum behind evergreen interest has been particularly strong during the last 24 months as fundraising for traditional, close-ended 10-years funds has cooled off and private markets managers and investors have sought alternative routes for securing and allocating capital.
The growing focus across private markets on raising more funding from the non-institutional investors has been a further spur for growth in evergreen fund assets under management (AUM), as evergreens provide family offices and individual investors with the opportunities to build exposure to private markets strategies at lower investment minimums (starting at $25,000 versus the typical $5 million minimum for a 10-year, close-ended fund) and periodic opportunities to take liquidity.
A natural evolution
The rise and rise of evergreen fund structures is a natural evolution for a private markets asset class that has ambitions to expand its investor base beyond its institutional core.
According to Hamilton Lane, evergreen funds currently account for just 5 percent of overall private markets AUM, which represents close to US$700 billion. Ten years on from now, however, Hamilton Lane anticipates that evergreens will account for at least 20 percent of total private markets AUM, with growth in allocations from high-net worth individual investors the key driver of the rise, as evergreen fund AUM growth outstrips that of 10-year funds.
Forecast growth for evergreen AUM, however, will not be driven exclusively by non-institutional channels, with Hamilton Lane expecting institutional investors to also increase their investment in evergreen structures as a tool for fine-tuning and managing private assets portfolios.
The liquidity optionality offered by evergreen funds has become particularly attractive for institutions during the last 24 months as interest rate dislocation has made it difficult for managers to exit portfolio assets at attractive valuations, leading to a slowdown in distributions back to investors. According to Bain & Co, distributions as a portion of net asset value (NAV) fell to just 11 percent in 2024 – the lowest rate in more than a decade.
Investors have had the option of taking liquidity through LP-led and GP-led secondaries deals but have often had to bear a discount to NAV when doing so. The opportunity that evergreen funds provide to offer some liquidity on a monthly or quarterly basis, at NAV, has appealed to institutions.
Long-term appeal
The appeal of evergreen structures, however, hasn’t only been supported by short-term, cyclical liquidity concerns.
Both institutional and non-institutional investors have also been attracted to other features of evergreen funds, perhaps most notably the time in the market that evergreens can offer.
In traditional 10-year funds large sums of capital have to be committed upfront, but as these funds are blind pool investment vehicles, those commitments are not put to work in assets on day one, but drawn down and invested over the investment period of the fund – usually five years.
Evergreen funds, however, will already be comprised of a core portfolio of assets, that investors will be fully invested as soon as they invest in the fund, providing much more scope to benefit from compounding returns.
Enabling investors to be fully invested from day one has a significant positive impact on the returns an evergreen structure is able to produce.
An analysis of the annualized returns generated by 13 equity-focused evergreen funds from Q3 2019 to Q3 2024 by Hamilton Lane found that evergreens outperformed both the MSCI Word Stock Market Index and all of private equity.
Hamilton Lane illustrates that an evergreen fund that generates a steady (but not spectacular) 12 per cent return over ten years will provide investors with a 2.5 times multiple on invested capital inside a decade. Only six percent of close-ended funds deliver the same money multiple, and have to produce IRRs of more than 20 percent to do so. Capital allocated to evergreen funds and fully invested on day one generates strong comparative money multiples without having to produce knockout returns.
Fee benefits
Fee and carry costs for evergreen funds also compare favorably to those of close-ended funds.
Management fees for the two types of fund structure come out roughly the same for the two structures after a 10-year period, according to Hamilton Lane, with closed-ended fund fees higher earlier in the fund life as capital is deployed during the investment period, and tapering off towards the end of the fund’s life, while evergreen fund management are spread out evenly through a ten-year period.
When factoring in carried interest costs, however, overall fund costs for evergreen funds come in lower than close-ended funds, with evergreen carry charged at around 15 percent and closed-ended fund carry holding at around 20 percent.
As more evergreen funds launch and competition for investor capital intensifies, fees for evergreen funds could come down further, particularly as more price-conscious individual investors invest growing sums in private markets evergreens.
A fund structure for the future
The closed-ended fund structure will remain an important pathway for capital deployment, but will not be the only route to private markets exposure in the future as non-institutional investors account for an ever-greater share of the investor base and institutional investors take advantage of the flexibility that evergreen funds offer for accessing liquidity and managing portfolios.
The uptick in evergreen fund launches is only just beginning.
Learn more about Alter Domus’ fund administration services
Alter Domus has significantly expanded its capabilities to support the administration of open-ended private market funds, including evergreen structures. This development aligns with the growing demand from institutional and retail investors for greater liquidity and flexibility in alternative investments.
Alter Domus has enhanced its open-ended fund administration by enabling more frequent NAV calculations and streamlined liquidity management, allowing fund managers to better meet investor redemption and subscription needs. Leveraging the Temenos Multifonds platform, the firm automates essential processes such as capital calls, valuations, and distributions, while integrating with financial networks like SWIFT and NSCC to improve settlement efficiency. It also offers comprehensive transfer agency services—acting directly in Luxembourg and partnering with providers in North America and the UK to manage diverse distribution channels. Additionally, Alter Domus has strengthened its investor reporting and regulatory compliance capabilities, including support for evolving frameworks like ELTIF 2.0.
The expansion of Alter Domus’ services reflects a broader industry trend toward the democratization of private markets. Regulatory changes in the EU, US, and UK are broadening access to private market investments, leading to increased demand for fund structures that offer liquidity and flexibility. Alter Domus’ enhanced capabilities position it to meet these evolving needs, supporting both traditional institutional clients and a growing base of retail investors. By leveraging advanced technology and comprehensive services, Alter Domus enables fund managers to efficiently administer open-ended and evergreen fund structures, aligning with the industry’s shift toward more accessible and flexible investment vehicles.
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