- What are evergreen funds? Investment vehicles with no set expiration date, allowing continuous fundraising and investment.
- Who’s involved? Major players like Blackstone and KKR are leading the charge.
- Why the hype? They tap into trillions of dollars of private wealth previously inaccessible.
- What are the risks? Potential liquidity mismatches and pressure to deploy capital quickly.
The Allure of Evergreen Funds: An Endless Money Machine?
Fundraising in the high-stakes world of private equity is a constant hustle. It’s like being on a never-ending treadmill, wining and dining big investors to secure cash for each new fund. The traditional closed-end fund structure also shuts out the average investor, leaving trillions of dollars of potential wealth untapped.
Enter the “evergreen” fund – a game-changer designed to break the mold. These funds, part of a larger group of alternative asset vehicles, offer continuous fundraising and, in some cases, periodic withdrawals for investors. According to Preqin, these funds now control approximately $420 billion.
But here’s the burning question: Are these evergreen funds a golden goose or a ticking time bomb?
Why the Rush to Evergreen?
Traditionally, buyout firms have relied on closed-end funds, where investors commit money for a fixed period (around a decade) and then receive their profits. However, this model is facing headwinds due to high interest rates and shaky markets. Private equity managers are sitting on a staggering $3 trillion of unsold assets, making it difficult to generate returns for existing investors and attract new capital.
The closed-end structure also excludes individual investors who collectively hold an estimated $150 trillion in wealth, according to Bain & Co. estimates. Evergreen funds aim to solve both problems by offering lower investment minimums and the ability to withdraw funds periodically.
Blackstone Leads the Charge
Blackstone, under the leadership of Steve Schwarzman, was among the first to crack the code with its BREIT vehicle. This fund allows ordinary investors to invest in real estate with as little as $2,500. Launched in 2017, BREIT exploded in popularity, reaching $70 billion in net asset value by late 2022. Blackstone followed up with BCRED, a credit-focused fund, and also manages evergreen vehicles for institutional investors, such as the $43 billion Blackstone Infrastructure Partners.
The Liquidity Balancing Act: Can They Deliver?
One of the biggest challenges for evergreen funds is balancing the illiquid nature of private assets with investors’ need to access their cash. While institutional-focused funds can use techniques like queue systems to manage withdrawals, retail investors demand more flexibility. Funds like BREIT allow limited monthly or quarterly withdrawals to prevent a mass exodus during market downturns.
To meet these withdrawal demands, evergreen funds hold a portion of their portfolio in liquid assets like cash and government bonds. These “liquidity sleeves” can comprise up to 20% of the portfolio, which can drag down overall performance compared to purely private asset investments.
Are Evergreen Buyout Funds Too Risky?
The real test for evergreen funds will be their ability to deliver competitive returns while maintaining liquidity. While the perpetual nature of these funds eliminates the “cash drag” associated with traditional closed-end funds, it also creates pressure to deploy capital quickly, potentially leading to ill-timed investments.
Moreover, evergreen funds may be forced to sell assets to meet redemption requests, which can be detrimental in volatile markets. The performance of BREIT, which had to restrict withdrawals in 2022, serves as a cautionary tale.
The Future of Private Equity: Boom or Bust?
The rise of evergreen funds is undoubtedly a boon for private asset managers looking to expand their reach. However, it also raises critical questions about managing liquidity, deploying capital wisely, and delivering consistent returns. Whether these funds become a sustainable force in the private equity landscape remains to be seen.
Success could also create new challenges, such as increased competition for deals and higher purchase prices. With the private equity industry already sitting on over $2 trillion in unspent capital, the influx of new money from evergreen funds could exacerbate this problem.
Key Takeaways for Investors:
- Do your homework: Understand the fund’s investment strategy, fees, and withdrawal policies.
- Assess your risk tolerance: Evergreen funds are not risk-free, and you should be prepared for potential losses.
- Consider your liquidity needs: Make sure you don’t need immediate access to the money you invest in an evergreen fund.