An evergreen fund is a “private fund… with unlimited duration… investing into illiquid assets. [Given the lack of liquidity], managers are required to offer some liquidity and redemption rights to investors,” said , partner, investment funds at CMS Luxembourg and moderator of a panel on fund financing at the Association of the Luxembourg Fund Industry’s Private Assets conference on 26 September 2024. That’s in comparison to closed-end funds, which usually display “a duration of 10 years” without redemption rights.
Why are evergreen funds gaining traction among investors?
Panellist , chairman and managing director at Commerz Real Fund Management, explained that at the end of the life of a closed-end fund, the fund manager may have an option to extend the maturity by two years depending on market conditions.
Yet Holz thinks that an evergreen fund enables the manager to create long term value by “developing, positioning, refurbishing properties,” as well as contracting long leases on real estate assets.
“There [are] a lot of investors out there who want the liquidity premium and want to invest--in theory--forever,” said Jan Witte, CEO at Record Financial Group, a financial firm managing just over $100bn in assets under management.
As Holz works in an organisation focusing on retail investors--Commerzbank--he thinks that having evergreen funds enables it to invest on a monthly or yearly basis.
Advantages of evergreen funds
Bada understands that these evergreen funds are “fully funded at day one… and very quickly fully deployed into the ongoing assets… giving a higher return back to investors.” On the other hand, he commented that closed-end funds may return less than for evergreen funds as they are based on capital commitments whereby capital calls are progressively implemented along the investment phase of the funds.
Witte reminded the audience that closed-end funds carry a “very natural timing risk” as there’s a starting point and there’s an end point, and then there’s some dependency on the vintage and the performances. “When it comes to evergreen funds, the asset manager needs to deliver… an additional feature--liquidity--that needs to be integrated into the investment strategy… in addition to delivering a return.” He continued: “it’s a slightly not like-for-like comparison.”
There’s a lot of interest from institutional investors that like the idea that I maybe have the opportunity to exit… but they are still expecting the close-end fund returns
Besides, Witte thinks that evergreen funds tend to be more attractive to “smaller investors” that cannot create “vintage diversification” easily.
Illiquid assets limit redemptions
“Offering illiquid investments in evergreen structures [result] inevitably in conversations around the concept of liquidity… and fair pricing [for the leaver and remainers],” said Witte.
“There’s a lot of interest from institutional investors that like the idea that I maybe have the opportunity to exit… but they are still expecting the close-end fund returns,” commented Holz.
As a lawyer, it will come as no surprise that Felicia Efta, head of funds legal--alternative EMEA at UBS, took some time to describe the design of some of their redemption provisions. “You start with a redemption… that’s broad enough to allow you to actually sell the underlying [asset] in a normal market... [that reflect] reality.” She continued: “then we have redemption provisions on a best effort basis… so that we’re not kind of tied to an obligation to sell assets if we don’t want to, or if we think it's not wise to sell them at that point in time.” Finally, UBS keeps the option to defer redemptions. She also talked about the use of gates that give guidance on periodic and realistic redemptions and the possibility to defer redemptions. However, the latter concept “tends to scare people… be questioned in RFPs… and be used in very bad market conditions.”
In addition, Efta noted that she is quite “alert” not to design redemption provisions that may create a run by easing “the process for investors to put redemption requests in, just in case, and then just remove them if they don't want for that.”
Evergreen fund used as successor fund
Bada observed that some closed-end funds continue their life, morphing into an evergreen fund or into a different successor fund with an indefinite horizon. That enables fund managers to hold on to successful companies. UBS received similar requests from investors to hold on to valuable assets in some infrastructure and real estate funds.
Specific features of evergreen funds
While UBS used evergreen funds in direct real estate and real estate funds of funds, Holz considers real estate, infrastructure, renewables as well as private equity as suitable assets for evergreen funds. As his firm is very much hands-on, Holz noted that “there’s not just the life cycle of 20 or 30 years. Often energy investments can [go through] repowering… as you have the right on the land… and you get close to local authorities.”
He added that he sees trends by some institutional investors to “move away from hard, closed-ended funds” into funds with very long-term investments with a notice period or “queuing or matching mechanisms to exit investment.”
AIFMD 2: A focus on liquidity
“The legislator has in mind the investor protection and the reputation of the fund industry,” stated Bada. He explained that the EU’s upcoming Alternative Investment Fund Managers Directive 2 introduced two important measures.
“Certain debt funds, the so-called loan origination funds, must be structured as being closed-end by default, unless its AIFM can demonstrate to its regulator that the liquidity management policy of that fund is appropriate in light of the investment policy of the funds.” On the second measure, he indicated “that for any AIFM, for any type of closed-end funds… at least two liquidity management tools from a list set out in AIFMD 2 must be included in the in the fund documentation.”
“That’s a European rule… it gives for every investor, every asset manager, service provider, etc, the same kind of framework… it’s a fair competition and it depends then on the skill set of the fund manager,” argued Holz.