Evergreen Predictions

Let’s talk about a few things we believe may happen in the Evergreen space. We’ll even provide the odds we give each event. 

This chart is the most compelling reason to consider evergreen strategies for all investors, not just high-net-worth investors. Sure, the underlying assets in evergreen funds are the same as (or very similar to) the assets in closed-end funds, but evergreen structures offer two massive advantages: 

• The ability to put all your money to work on day one gives you that magic of compounding returns that investors like Warren Buffett say is the secret to long-term investment success.  

• The evergreen fund manager immediately reinvests proceeds into new investments (in contrast to closed-end funds, which send proceeds back to LPs, putting the onus on LPs to sort out how to stay invested). This keeps the eighth wonder of the world working in investors’ favor.  

Our corporate finance 101 textbooks tell us that, if your evergreen portfolio delivers a 12% return over 10 years—nothing heroic—then, you’d expect to have 2.5x your initial investment after eight years. Only about 6% of closed-end funds generate a 2.5x TVPI and they typically have IRRs above 20%.  (Yes, your private equity portfolio construction 101 textbook tells you that your “nothing heroic” evergreen portfolio is delivering basically top-quartile fund returns.) 

While comparisons of evergreen performance to the IRR of single, closed-end fund investments is not exactly a “like-for-like comparison” since it ignores differences in duration, re-investment and control over new investment (a series in closed-end funds is a better comparison but is beyond the scope of this humble overview), the trend and simplicity favor evergreen solutions in many situations. 

If you haven’t figured where we think the private markets world is going yet, let us spell it out more clearly with an analogy: Most of us should be investing heavily in evergreen funds. Period. Here’s our analogy. You need a very nice picture on your wall, and you love Van Gogh’s style. You can go somewhere and get a beautiful canvas print of “The Starry Night.” It’s easy to find, looks great on your wall, is hard to tell apart from the real one and isn’t very expensive. That’s your evergreen fund/portfolio. 

Your drawdown fund/portfolio is, instead, analogous to you going out and buying a canvas (or two…or three), paints in a variety of different colors and brushes, then setting about painting your own Van Gogh, or some other picture that is best suited for your wall. Some of you will have the right blend of talent, time, planning and information to create something that is perfect for the space. It might not be “The Starry Night,” but it will be exactly what is right for your objectives. For you, it’s better than any original Van Gogh. 

But is that realistic for most of us? It’s not. Most of us will take the canvases and the paint to create something decidedly worse than that easy canvas print we got online. 

Don’t overthink this. 

Ok, what about the higher fee load? (Before we get to that, please note that the prior return numbers are net of fees, so there is that basic fact to consider, but we’ll humor everyone and look at fees separately.) 

We took fees on six evergreen funds and compared the fees and carry to six closed-end funds of the managers that had those six evergreen funds. We assumed the same commitment to open and closed-end funds. We calculate the fees paid as a percentage of NAV (which we refer to as a total expense ratio or TER) to normalize for compounding effects (and because the structure of closed-end fee terms makes it a nightmare to compare the headline fees). 

Let’s just look at the U.S. figures. Today, the U.S. high-net-worth channel has less than 1% allocated to evergreen structures. If that figure rose to 5% or 6% over the next 10 years, that 20% overall share of private markets would be achieved. That just doesn’t seem that hard. It’s especially not that hard when you consider that is only the U.S., and there are massive amounts of capital outside the U.S. that will also find a home with evergreen structures. 

We know the chorus: Nope, evergreens don’t get good returns and are too expensive and won’t go anywhere. 

Today, evergreen funds account for roughly 5% of the overall private markets. That’s nearly $700 billion.  Our view is that 10 years from now, evergreen will be at least 20% of total private markets. To reach that level, and assuming the private markets continue to grow at their historic 11% growth rate, evergreen would need to grow almost triple that rate, almost 30%. Can it? 

The various types of evergreen funds that have exploded recently show no signs of slowing down. 415 new funds were launched between 2017 and 2023, and we hear anecdotal discussions of hundreds of new funds under discussion and development at any point in time today. They offer an appealing balance between access to the types of private markets exposure institutions have long had with more user-friendly structures and some degree of liquidity. 

Our view is that evergreen structures will come to form a major part of the private markets landscape in a very short time frame, and their place in the landscape will not just be limited to retail portfolios. Institutional investors will increasingly adopt evergreen structures as yet another portfolio tool. 

Growth of Evergreen Funds

Into this fundraising void has stepped one of the most important developments in private markets over the last 10 years: the growth of evergreen funds and their acceptance in the wealth channels globally.

management fees and accrued carry as a % of nav

management fees as a % of nav

Note:  For illustrative purposes only. 
The Multiple on Invested Capital of the closed-ended fund assumes that both unfunded capital and distributions received from the buyout fund grow at a 5% interest rate per annum. Multiple on Invested Capital also assumes a time horizon of 8 years.

performance cost to increase liquidity?

annualized returns q3 2019 - q3 2024

growth of private markets & evergreen funds

usd in trillions

growth of evergreen aum

usd in trillions

Evergreen funds look cheaper once carried interest is factored in. This makes sense, since carried interest for closed-end funds sits stubbornly at 20%, while carried interest for evergreen funds is more frequently 15% (and can be lower!). The better the performance, the cheaper (on a relative basis) evergreen funds look.  

On a management fee basis, the TERs over a 10-year time period are roughly the same. Closed-end fund fees are higher early on but lower once the investment period ends. What about when we account for carry? 

We looked at 13 equity-focused, evergreen funds. While their performance history is short, evergreen funds did slightly better than closed-end PE funds and outperformed the public markets over the last five years. Will this continue? We don’t know, but if we are going to argue that evergreen funds don’t have good performance, we’d sure hate to see this data.