Last week, I moderated a session at the CII Private Assets Conference on one of the latest trends in investing: evergreen funds.
As always, our industry does love fancy term.
In simple terms, evergreen funds are investment structures with no fixed end date. Unlike traditional closed-end private market funds, where your money is typically locked away for 7 to 10 years, evergreen funds usually offer some level of liquidity.
That sounds appealing.
But like most things in investing, the reality is more more complex than that.
The appeal is obvious.
Investors like the idea of accessing private assets such as private equity or private credit without committing capital for a decade with no way out.
For managers, evergreen structures can also be attractive because they allow capital to stay in the fund longer and avoid the constant cycle of raising and winding up traditional closed-end vehicles.
And to be fair, some assets are better suited to an evergreen structure than others.
But the structure itself does not remove the underlying risk.
For me, the key issue is liquidity.
My favourite sayings when it comes to liquidity are “it doesn’t matter until it does” or another favourite is no one wants their money back until they are told they cannot have it!”.
For me, the key point is that in a major market dislocation, liquidity will vanish, as everyone runs for the exit and the fund suspends redemptions. This is why it is important to understand the technical details of how the evergreen structure works and to be clear on why you’ve chosen this structure and the assets that back it, before you invest a single cent. In these structures, the details matter.
We are seeing a similar theme emerge in the growing number of LITs, LICs and ETFs backed by illiquid assets such as private credit and private equity.
These products are often presented as offering liquidity, when in reality the underlying assets are anything but liquid.
That disconnect matters.
Because at the end of the day, the structure may trade or offer redemption features, but the underlying investment risk has not magically changed.
I worry about the ability of retail investors (the so-called “mums and dads” investors) to fully understand what they’re buying. Caution is warranted here. At the end of the day, the assets remain illiquid, and in a major market dislocation, things can turn ugly. Caveat emptor.
I am not against evergreen funds.
But I do think investors need to be careful not to confuse packaging with liquidity, or access with safety.
Liquidity needs to be thought about properly at the total wealth level, not just product by product.
Because when markets get messy, the technical details suddenly matter a lot.
And by then, it is usually too late to start reading the fine print.
If you are thinking about private assets and want an experienced, independent second opinion on liquidity, structure and portfolio risk, you can learn more about my independent Outsource Chief Investment Officer (OCIO) service here.
Kind regards,
Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently
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