Evergreen funds are occupying a growing share of the secondaries market—predicted to comprise 30% of AUM within three years—as fund managers look to offer greater liquidity to a growing universe of private wealth investors.
Evergreen vehicles, or open-ended funds, allow LPs some limited ability to redeem from the fund. Traditionally, it is more suitable for income-producing assets as GPs can use the cash generated to pay out a limited amount of redemption.
According to a recent PitchBook analyst note, the liquidity these vehicles offer has become important to GPs across all strategies as they look to broaden their investor base and tap into the $450 trillion private wealth channel.
The secondaries market in particular has seen a flurry of activity this year. Earlier this month, Apollo launched its S3 Private Markets Fund to target accredited wealth investors in the US and Apollo S3 Private Markets Lux fund for the EMEA region, Asia and Latin America.
ICG also announced in its full year 2023 earnings call in May that it is launching ICG Core Private Equity to open up secondaries investments from the US wealth market. Meanwhile, Coller Capital launched Coller Secondaries Private Equity Opportunities Fund, which offers quarterly redemptions, in February, also to woo private wealth investors in the US.
“Secondaries lends itself well to an evergreen fund type because of the regular cadence of distributions and liquidity being generated from secondary transactions,” said Sunaina Sinha Haldea, global head of private capital advisory at investment bank Raymond James, which predicts evergreen funds could take up as much as 25% to 30% of global secondaries AUM in the coming years.
She also notes that evergreen funds give secondary investors a replenishable capital base, in contrast to closed-end vehicles that require a new fundraise every few years. It also gives them the ability to stay invested for longer. “These are vehicles that can compound in size very quickly,” she added.
The result is that many more firms are looking to launch their own evergreen funds.
Thiha Tun, a partner in the private investment funds practice at the law firm Goodwin, expects all major investment firms to have launched their open-ended secondaries vehicles in the next five years.
“These are essentially permanent capital vehicles so once they have raised their capital, they can continue to just recycle that capital indefinitely. Assuming they perform well, they are a source of long-lasting competitors to the traditional funds with fixed terms,” he said.
Tun added the new fund structure will introduce price competition to the market as the evergreen funds tend to target lower IRRs and sometimes give LPs management fees or carried interest breaks, leading to the ability to pay a higher price for portfolios than closed-ended funds.
Balancing benefits
On the other hand, open-ended vehicles also face a significant kind of administrative and regulatory framework from a closed-ended fund, potentially bringing extra burden to the management.
Ultimately, managers will have to weigh the benefits of putting their resources toward creating higher fee-generating closed-ended funds or go for the lower-fee option of an open-ended structure.
For private wealth investors, it’s important to identify the concentration and liquidity risks of the new products, said Tun, who believes that investor education will still take up the bulk of conversation as these products are relatively new.
For example, wealth investors would want to be able to identify different deal types in secondaries to avoid putting all of their eggs in one basket. They also have to realize that the liquidity given by evergreen vehicles does have limitations.
While the evergreen secondaries market continues to grow, there will be more options for products that cater to different needs. Sinha Haldea added that a good way to achieve diversity would be to pick those that also include co-investments or primary fund investing.
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