Evergreen Funds: We Have Questions

By Hilary Wiek, CAIA CFA, Principal Analyst, Fund Strategies, PitchBook

Private markets are rapidly expanding into portfolios of investors previously excluded due to income or wealth restrictions. Asset managers, seeing a decline in institutional investors willing to grow commitments to private markets, are adapting — creating products with lower minimums, immediate investment ability, and periodic liquidity. These features address real limitations of drawdown funds and appeal to individual investors. Government enthusiasm is helping: in 2025 alone, the SEC proposed amendments to the accredited investor definition, Congress passed the INVEST Act, and President Trump signed an executive order encouraging private market investments in 401(k) accounts. As of now, this act has only passed through Congress and is not law, as it has not yet passed through the Senate.

In 2023, I published An LP’s Guide to Manager Selection, drawing on 25 years of institutional investing experience to evaluate private market managers. That piece did not contemplate the evergreen space, and the unique structure demands its own questions. What follows applies the same six P’s framework — people, philosophy, process, portfolio construction, performance, and price — to the specific demands of semi-liquid funds. These questions are relevant not only to those investing in evergreen funds, but to anyone assessing what a manager’s expansion into this space means for its existing drawdown funds.

The people P covers firm management, investment teams, ownership structures, and alignment. In the evergreen context, several new lines of inquiry arise.

When multiple managers co-manage an evergreen fund — as is now happening with Capital Group and KKR, and with Wellington, Vanguard, and Blackstone — who controls which decisions? How is asset allocation determined? Who handles inflows, redemptions, valuations, and liquidity management? Investors should probe why a co-managed structure would be better than single-entity management.

If a name-brand firm is offering an evergreen product, will the team actually managing it bear any relation to the team that built the brand? Many evergreen funds are using secondary purchases to deploy inflows, which means portions of the portfolio are managed by whichever GPs issued those underlying funds. The people investors underwrote may not be the people managing their capital.

Alignment is also worth scrutinizing. Evergreen funds can easily eclipse the size of even the largest drawdown funds, and fees on non-institutional products tend to be higher. If management fee income from evergreen products becomes dominant, the 20% carried interest on drawdown funds may no longer be the primary incentive. And unlike drawdown funds where the GP commitment is held captive alongside investors, in an evergreen structure, managers may be able to use liquidity provisions to reduce their own exposure over time.

It is not enough for a fund manager to say their evergreen product is, for example, a PE fund. Given liquidity obligations, the fund may hold a significant liquidity sleeve and secondary fund interests alongside direct private companies — a materially different composition than a drawdown fund. Investors should press for a clearly articulated philosophy.

Is the manager seeking to provide beta exposure or alpha? The patience and effort required to invest only in the best opportunities — work to create value and sell at a gain — may conflict with investors’ expectations of immediate private market exposure. Managers may be incentivized to just buy something rather than waiting for the right price. Past success in drawdown strategies may not be replicable if the manager has to give up control by purchasing secondary stakes rather than acquiring controlling positions. And investors should ask directly: is the evergreen structure truly the right one for this manager’s strategy, or is this primarily a response to difficult drawdown fundraising conditions?

Deal structuring may need to change in an evergreen context. A manager whose reputation was built on fixing distressed companies may shift toward more stable earners to support income-based liquidity. Investors should not assume drawdown track records translate directly.

Conflict of interest management deserves particular attention when a position is held in both a drawdown fund and an evergreen fund. If additional capital is needed for a portfolio company, will the evergreen fund provide it? If so, who advocates for each fund’s interests in that decision? And if a manager is buying secondary stakes to deploy capital, investors should understand whether this is a temporary ramp-up strategy or an ongoing approach — and whether the underlying managers of those secondary stakes have been vetted.

In addition to diversification across multiple dimensions, evergreen funds require active liquidity management — and a surprising number of managers are still working out their approach. The basic models include holding cash sufficient for the maximum allowed redemptions, relying on portfolio income and exits, or using lines of credit. Each carries trade-offs. Credit lines minimize cash drag but carry real risk if a crisis hits precisely when redemptions peak and creditors pull back simultaneously.

Investors should also ask: What is the fund’s approach to large inflows when market conditions make primary investment unattractive? At what point does the manager consider the fund fully mature, and what does that look like? What are the upper and lower capacity limits? Too much capital can dilute discipline and water down the best ideas. Too little can prevent adequate diversification in strategies requiring significant or controlling stakes.

Valuations are far more consequential in evergreen funds than in drawdown funds. Investors buy in and redeem at manager-determined NAVs, and some funds allow performance fees based on those same marks. Investors should understand the fund’s valuation policies for illiquid assets, whether third parties are engaged to review those valuations, and how much of a fund’s historical return reflects realized exits versus GP markups.

Two issues warrant attention: secondary stake purchases are often acquired at a discount to the underlying GP’s NAV and immediately marked up to that NAV, producing a short-term gain that inflates early performance. Investors should probe how much of a manager’s track record reflects this phenomenon. 

Separately, the other issue is that fund managers should not be permitted to imply that historical IRRs from drawdown funds are meaningful predictors of evergreen fund time-weighted returns. They are structurally different calculations and comparison is inappropriate.

Evergreen fund fees can be complicated, difficult to compare, multilayered, and advantageous to fund managers. Investors should request an itemized list of every fee charged by share class — management fees, acquired fund fees from underlying funds in secondaries situations, interest expenses, loads, and anything else. Performance incentive fees on unrealized, manager-valued investments introduce a serious conflict of interest and should be scrutinized closely.

Redemption terms are also more complex than they appear. Investors should understand lockup periods, interval amounts, redemption loads, and — critically — what conditions allow the manager to suspend redemptions entirely.

The promise was for only six P’s, but below are some additional thoughts that do not fit neatly into the above framework that may potentially be useful to investors with funds to allocate:

• Investor concentration: Who are the big investors in the fund? What percentage of the fund is held by the largest investor? Is there an upper limit on how big one investor can be? Do larger investors get any rights that could disadvantage other fund holders? Asset managers will often seek out an anchor investor that will get the fund to a scale that will both make the intended investment approach viable but also attract other investors who are comforted by the presence of “smart money.” But if there is too much concentration and a larger investor chooses to depart the fund, smaller investors may be left with a pile of illiquid investments as the fund’s liquidity is tapped out in funding just one investor’s redemptions.
• Suitability: Just because an investor can access private markets, that does not mean they should. Any prospective investment should still be evaluated for suitability. Even with the presence of some liquidity, it still makes sense to match investments to an investor’s risk tolerance and time horizon. Some managers of evergreen funds wince at the oft-used term semi-liquid, as they want investors to think of private market investments as long-term investments rather than something they can get into or out of at will. And then there are the fees: Getting access to the benefits of private markets funds may come at too high of a cost, especially for lower investment minimum share classes.
   

The full version of this paper can be found here.
 

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