Retail investors interested in private markets used to have no choice but to put their money into closed-end funds, with typical lock-up periods of 10–12 years. That has changed with the proliferation of so-called evergreen funds, which are becoming increasingly popular among asset managers and clients.
The funds offer clients flexibility, allowing them to purchase or redeem units periodically — often on a monthly or quarterly basis. They also have no fixed end date and generally have lower investment minimums than closed-end private-market funds.
Evergreen funds represented at least US$350 billion in global net asset value at the end of 2023, according to a report by Preqin Ltd., an alternative assets data provider, released this year. And, over the past five years, the number of evergreen funds has almost doubled to more than 500.
“That’s tremendous growth,” said Tom Gilman, senior wealth advisor and senior portfolio manager with Harbourfront Wealth Management in Vancouver. “And that proliferation of evergreen funds is intended to attract capital, specifically from the wealth management channel and those advisors with high-net-worth clients.”
A growing number of wealth management firms are promoting evergreen funds as part of the offering to clients, Gilman said, and “more clients are seemingly agreeable and becoming comfortable holding these investments within their portfolio.”
At the same time, asset managers in Canada are increasingly rolling out these investment vehicles. Over the past two years, Purpose Investments Inc., BMO Global Asset Management Ltd., CI Global Asset Management and Sagard Holdings Manager (Canada) Inc., to name just a few, launched evergreen funds in Canada.
“Generally speaking, we’re still fairly early in the wealth management channel in Canada in adopting alternative investments or private investments,” said Nimar Bangash, CEO of Toronto-based Obsiido Capital Management Ltd. “But those that are investing in the space are almost unequivocally investing through evergreen funds.”
Obsiido offers three evergreen funds — two that are broadly available to eligible investors and one that is available exclusively through an independent dealer — as well as software to scale the investment process.
“A true private fund with a closed-end fund structure creates an immense amount of operational and administrative burden for advisors, where an evergreen fund doesn’t create that same stress,” Bangash said. An evergreen fund presents “less-friction” for advisors.
As well, like other private-market investments, evergreen funds are uncorrelated with public markets, so they can be used to diversify portfolios, said Brent Smith, chief investment officer with Kinsted Wealth in Calgary, which invests clients’ assets in evergreen funds.
“The whole goal of portfolio management is adding non-diversified assets to your portfolio, and these things will do the trick,” Smith said.
Smith also noted the relatively low minimum investment threshold for evergreen funds — typically in the tens of thousands of dollars, compared with the millions needed to invest in closed-end private-market funds.
Caution still warranted
While evergreen funds provide more liquidity than their closed-end cousins, clients should exercise patience and position the products within a long-term investment strategy, Smith said.
“View them as the illiquid part of your portfolio, recognizing that circumstances may change and you may have to access some of that money at times, which is fine, but go into this with a long-term mindset,” Smith said.
Clients should also take a close look at the funds’ fee structures.
Some evergreen funds invest in private businesses directly, “so there’s no embedded fee in the business [the funds are investing in],” Smith said. Others may be secondary funds, which “already have embedded fees and embedded performance fees on top of the fees that the fund is charging. Those fees, in certain cases, can be pretty significant.”
Bangash recommends consulting fund disclosure documents, as there may be limits to the amount investors are able to redeem from an evergreen fund in a given period.
And, while many liken the structure of evergreen funds to that of mutual funds, evergreen funds are still private-market investments, with less transparency regarding their performance, which can make assessing their risk more difficult, Gilman said.
“You can expect to receive monthly or quarterly updates on the performance of your private investments in evergreen funds. You can expect to receive commentary on the macro environment or the actions or transactions undertaken by the manager,” he said. “But you will never have the level of transparency of an underlying portfolio company that you would have … in public funds.”
Fund performance
There are mixed views on the performance of evergreen funds versus closed-end funds.
As Gilman pointed out, there is more liquidity in evergreen fund structures, so a certain amount of an evergreen portfolio must be put into short-term, cash-like investments in order to fulfil investors’ redemption requests.
“So, there’s cash drag in that portfolio, and [it’s] very unlikely that an evergreen portfolio will ever be able to keep up with a traditional closed-end portfolio,” he said.
Bangash expressed an opposing view. At a recent virtual mid-year review of Obsiido’s evergreen portfolios, he noted that evergreen fund structures mitigate the impact of the negative side of the J curve, which describes the tendency of private-equity funds to post negative returns in their initial years and positive returns in later years, when the investments mature.
“Your money is typically invested in the ground on Day 1, when you subscribe into these vehicles,” he said of evergreen funds. “And that really takes away some of the cash drag and J curve that is heavily prevalent when investing through … a closed-end, vintage-based structure.”
Bangash also pointed to a report from Partners Group Holding AG, which highlights that the success of open-ended funds is ultimately reliant on the investment acumen and investment flow of a manager.
“There is this myth that closed-end private funds, generally speaking, should outperform evergreen private-market funds, and there is now more and more research coming to market that is kind of busting that myth,” Bangash said. “We think that through an evergreen structure, you can get just as good performance, if not better, than many closed-end funds.”
This article appears in the November issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.