Evergreen Fund Structure
Hi! Just an intern reading up before my internship starts.
Could someone explain how evergreen funds work in that how is carry allocated when you may potentially not have any exits? Came across a firm that only has an evergreen structure with no traditional funds being raised and no exits since inception about 6-7 years ago. In such a case how does carry work? How does liquidity for investors work?
For a fund manager, I can't understand why an evergreen fund would be preferable to a traditional structure. Aren't you more susceptible to scrutiny when you have to report continuous valuations more often (I'm guessing) and investors can liquidate whenever they want? why wouldn't a pe firm just prefer a continuation vehicle if the investments they are making are really high conviction enough to warrant a continued investment in them?
Sorry if this is a stupid question
Well you do have exits, exits are done on a rolling basis as opposed to at the 5-7 year fund lifetime end. In an evergreen structure, investments are made and exited continuously.
gotcha! thank you:)
the company i was looking into has no exits, so i was wondering how say hypothetically an employee there would have their compensation structured, or how it would work if one of their investors wanted to liquidate? or is a firm like that more of an exception in the evergreen funds space?
What do you mean they have no exits? They just invest and hold it in perpetuity? There is no way there are no exits, an evergreen structure ≠ no exits. Can you name what company this is? Interested in looking further.
I mean, Berkshire Hathaway exists.
That is very true, but at least in a more traditional private markets investing sense a buy + hold strategy is more unusual, and isn't what you'd usually expect as a strategy from a PE firm.
Based on the most helpful WSO content, here's what you need to know about evergreen funds:
Evergreen Fund Structure
1. Carry Allocation: - No Exits: In an evergreen fund, carry (or carried interest) can be more complex to allocate due to the lack of traditional exits. Typically, carry is realized upon the sale of an asset, but in an evergreen structure, this might be based on periodic valuations and distributions. - Periodic Valuations: The fund may rely on periodic valuations to determine the fund's performance and allocate carry accordingly. This can involve more frequent and detailed reporting to ensure accurate valuations.
2. Liquidity for Investors: - Redemptions: Investors in evergreen funds often have the ability to redeem their investments at certain intervals, providing liquidity. This is different from traditional PE funds where capital is locked up for a set period. - Continuous Reporting: Evergreen funds may require continuous or more frequent reporting to provide transparency and justify valuations, which can be scrutinized by investors.
3. Preference for Fund Managers: - Scrutiny and Reporting: Evergreen funds do face more scrutiny due to continuous valuations and the potential for investor redemptions. This can be seen as a downside compared to traditional funds where reporting is less frequent. - Continuation Vehicles: For high-conviction investments, continuation vehicles can be an alternative. These allow fund managers to extend the life of specific investments without the need for a full evergreen structure.
Why Choose an Evergreen Fund?
Conclusion
Evergreen funds provide a unique structure that offers both benefits and challenges. They require more frequent valuations and reporting, which can lead to increased scrutiny. However, they also offer flexibility and the potential for long-term value creation. For fund managers, the choice between an evergreen fund and a traditional structure depends on their investment strategy and the preferences of their investors.
Sources: Do PE funds stop caring about certain investments once the fund has crushed it?, Why I Left PE & Switched to the Public Markets, Q&A: PE Secondaries Principal, Q&A: PE Secondaries Principal, PE Funds that Win - and IB that Tries
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