What are private equity funds?
This better-known product works in a more closed way and places greater demands on the investor. To invest in it, the investor commits to investing a set amount of money over a set period of time, as if paying in installments. These contributions are generally made over the life of the fund, which is finite and usually lasts about ten years, split into two five-year phases. Once the fund exits its positions, the profits are returned to investors.
What are evergreen funds?
Evergreen funds, which also invest in private equity, are more flexible, which explains their success in recent years. In these vehicles, the investor doesn't have to make contributions in installments or commit to investing a set amount of money; instead, they buy a stake at its current value (fair value) and may or may not increase their investment in the future. The biggest advantage of these funds is that the investor gains exposure from the start.
In addition, these funds are slightly more liquid than traditional ones, especially the semi-liquid category, in which the investor can withdraw their money periodically.
3 differences between evergreen funds and private equity funds
To make it even clearer, let's list the main differences between the two types of funds.
Exposure to investments
Private equity
In traditional funds, exposure builds gradually as managers buy stakes in companies. Even though it's gradual, the investor has committed to paying in money periodically. This means that for a while their money sits idle waiting to be invested, without earning a return.
Evergreen funds
In open-ended funds, the investor has exposure and earns returns from the moment they enter the vehicle. They can also freely decide whether or not to increase their position in the vehicle, without having to make a prior commitment.
Liquidity
Private equity
The holding period is generally ten years. The first five years are when capital is paid in (drawdowns or capital calls) and investors contribute the installments we mentioned. In the second five years, positions are exited and investors begin to receive their money plus the returns generated.
Evergreen funds
By contrast, evergreen funds offer liquidity windows that investors can use to receive part of their money. Within this category are semi-liquid funds, in which 15% is kept in liquid assets to give investors more flexibility.
Returns
There's no clear answer here, because it depends on how each fund is managed. Some traditional funds are more profitable than evergreen funds, but setting that aside, the MOIC (multiple on invested capital) turns out to be higher in the latter.
According to the analysis by Ralph Eissler, head of Private Markets Research at Neuberger Berman, in FundsPeople, “when examining illustrative returns on a MOIC basis, they observe that an investor in the evergreen fund with 15% liquidity generates a MOIC of 3.2x versus 2.7x in the series of traditional funds, while the evergreen fund without liquidity generates a MOIC of 3.6x. The reason for this disparity is that the latter are fully funded from day one, which allows the full $100 to be deployed and to start compounding immediately.”
Outlook for private equity and evergreen funds
The future for both types of funds is promising: Bain and Company expects private markets to grow to between $60 trillion and $65 trillion by 2032 in investment vehicles alone. In June 2023, the total capitalization of this market was $13 trillion. In Spain alone, according to the CNMV (Spain's securities market regulator), there are already more than 300 investment funds operating this way.
Major banks such as JPMorgan have said that evergreen funds, together with AI, are the two main global investment opportunities in 2025.
