What to Know About Evergreen Alts Funds

Over the past two decades, private markets have become a powerful force in the investing landscape.

In that time, the number of publicly traded companies has fallen by nearly half,¹ to 3,500—partly due to companies staying private for longer before going public. Meanwhile, the number of companies controlled by private equity has increased nearly sixfold,² to 11,500. The private credit market has boomed as well, from next to nothing to a $1.7 trillion business.³

All in, global private markets—including private equity, private credit, real estate, and other alternative assets—accounted for $18.7 trillion in assets under management in 2024 and are expected to exceed $24 trillion by the end of the decade.⁴

While private markets have long been an attractive source of diversification and potential outperformance relative to public markets, access has historically been limited to institutional investors through highly illiquid, complex fund structures, known as drawdown funds.

Drawdown funds have several features that have historically made them either inaccessible or unattractive to individual investors. These barriers to investment include:

• Illiquidity: Drawdown funds can lock up an investor's capital for a decade or even longer.
• High investment minimums: Many drawdown funds have minimums of $1 million or more.
• Timing: Drawdown funds accept capital commitments only during a narrow fundraising window and generally don't accept new investments once the window closes.
• Operational complexity: Drawdown funds typically don't take investors' principal all at once. Instead, fund managers make capital calls, or formal demands for a portion of the investor's total committed capital. Capital calls are made as needed to fund new investment opportunities and therefore are not always predictable, creating potential challenges for investors to raise the required capital by the fund's stated deadline. Furthermore, failing to honor a capital call within the specified timeframe can carry significant financial and/or legal repercussions for the investor.
• Performance: The initial investment period for drawdown funds is generally characterized by negative returns due to upfront management fees, fund expenses and startup costs that are incurred while capital is deployed in underlying investments. Overtime, the fund may generate positive returns as these investments mature and proceeds are realized. This trajectory – otherwise known as the J-curve – is inherent in drawdown fund structures, where it can take years before investors start seeing positive returns on their investment.
• Tax reporting: Drawdown funds' limited partnership structure can complicate tax reporting, creating another obstacle for retail investors.

A relatively newer category of private-market funds, known as evergreen funds, seeks to address some of these issues.

Sometimes called semi-liquid or "open-ended" private-market funds, evergreen funds may offer a more flexible way to access private assets.

Characteristics of these structures include:

• Perpetual subscriptions and redemptions: Unlike closed-end drawdown funds, which accept new subscriptions only for a limited period and wind down after a fixed term, evergreen funds generally accept subscriptions and redemptions on an ongoing basis.
• Smaller minimum investments: Minimums for evergreen funds can be as low as $2,500. Many evergreen funds allow investors to add to their original investments over time rather than requiring large upfront commitments.
• Immediate deployment of capital: Evergreen funds put investors' capital to work right away, eliminating the unpredictability and cash-flow challenges that investors face with capital calls.
• Limited liquidity: Most funds either intend to or are required to provide a limited amount of liquidity (typically 5%) to investors on a periodic basis—often quarterly—subject to any gating provisions (see "Risks and considerations," below).
• Simplified tax reporting: Some evergreen funds provide 1099s for tax reporting instead of K-1s.

Evergreen funds come in several different structures, with the differences shaping how they operate, report, and interact with investors. Generally speaking, there are four main varieties:

• How they work: These offer some liquidity through periodic repurchase offers. At scheduled intervals, typically quarterly, they're required—absent extraordinary circumstances—to buy back at least a small percentage (usually 5%) of outstanding shares at the current net asset value (NAV).
• When they're used: This structure typically is used to access areas of the market that generate predictable or recurring cash flows, such as private credit or real estate.

• How they work: These funds also offer to buy back shares from time to time but are not committed to a schedule or amount (but usually not more than 5%). Managers typically "intend" to provide limited liquidity, but repurchase offers are at their discretion and are unlikely during periods of market stress. In addition, tender offer funds are not required to make repurchase offers at the current NAV.
• When they're used: This structure is typically employed for strategies that don't generate predictable cash flows or that lock up capital for longer stretches, such as private equity or niche asset classes.

• How they work: Like public REITs, these funds invest in real estate and/or mortgages and must distribute taxable income as dividends. And as with a tender offer fund, these funds offer the potential opportunities to tap liquidity, but there are no guarantees.
• When they're used: This structure is for funds that invest primarily in private real estate or real estate-related debt.

• How they work: These funds offer high-yielding loans to smaller companies and typically pay income distributions. Like nontraded REITs, they must pass through taxable income to investors. They also offer the potential for liquidity, but it's at the discretion of the BDC's board and therefore not guaranteed.
• When they're used: BDCs generally provide access to private credit.

Evergreen funds may offer certain advantages to some investors over their drawdown counterparts, but they should still be approached with caution for several reasons:

• Limited liquidity: Evergreen funds' limited liquidity provisions may offer more potential opportunities to access capital than traditional drawdown funds, they're still relatively illiquid compared to publicly traded securities such as stocks or exchange traded funds. In fact, evergreen funds may "gate," or restrict redemptions, especially during periods of market stress. In short, Investors in evergreen funds may not be able to sell their shares when they want or need to. Funds may also charge early withdrawal penalties during lockup periods. Additionally, a fund's intended, or required, buyback amount may become oversubscribed if too many investors request redemptions, leaving investors with only a pro rata share of the requested redemption amount.
• Muted returns: Funds with liquidity obligations may maintain higher allocations to cash or other liquid investments that generally have lower expected returns than private assets. This may potentially result in lower returns to investors than drawdown funds.
• High fees and expenses: Just as with any private-market investment, evergreen funds typically charge annual management fees of 1%–1.5% of their NAV, plus performance fees of 10%–20% on returns that beat a set target (hurdle rate). Investors should pay particular attention to NAV-based performance fees, which may be based on unrealized gains, and be aware of potential early redemption or placement fees, especially in broker-sold products.

Private markets are no longer the exclusive domain of institutional investors. While not without risks or tradeoffs, evergreen funds may offer a practical, flexible way for more investors to broaden their horizons beyond public markets.

For investors whose risk profiles and time horizons support some exposure to private markets, evergreen funds may help diversify their holdings beyond traditional stocks and bonds to potentially mitigate risk and/or enhance returns.