2. Does your evergreen private equity strategy have robust, consistent, and priority deal flow?
Why it matters: A private equity strategy is only as strong as its underlying investments. Maintaining an “always on” vehicle requires a robust sourcing engine to align inflows with deployment, manage deployment effectively, and source and size allocations appropriately. Some managers have access to deal flow across their own platforms, while other managers rely on third-party deals through co-investments or secondaries.
What to look for: Single-manager evergreen strategies typically participate in transactions at their own firms. As a result, single-manager vehicles tend to have the best possible information about which companies are in their pipeline, the timing of those deals, when exits are on the horizon, and when distributions might occur. Single-manager vehicles focused on investing in controlled positions have even more information regarding their underlying portfolios, including real-time operational metrics, strategic progress, and risk factors. These attributes can allow for more efficient portfolio management, superior portfolio construction, proactive risk management, and more predictable cash flow generation, all of which provide structural advantages for a scaled evergreen strategy.
Not all single-manager strategies are created equally, however. Some aim to replicate the institutional experience by investing in the same deals at the same time and at the same price as the manager’s drawdown vehicles. Conversely, some evergreen vehicles acquire companies the manager’s institutional funds turned down, invest through any capital “left over” after institutional pools have participated, or execute entirely separate “whitespace deals” outside of the manager’s other strategies. The breadth of a manager’s platform also determines the scale of available deal flow—for example, sector-specific managers may have less robust sourcing engines than managers investing across a wide range of sectors and/or geographies. In some cases, where managers have limited breadth, their evergreen vehicle is investing behind novel, untested strategies.
On the other hand, multi-manager strategies typically have access to a wide swath of investment opportunities because they invest across other managers beyond their own platforms. While this broad approach can provide a potentially larger investment universe, it also presents challenges related to not having control over deal flow. For example, co-investors typically cannot access all deals originated by third-party firms and are often presented with opportunities only after these firms’ own funds and clients have been accommodated. Additionally, co-investors can find it difficult to manage the sizing of their allocations, as they generally cannot control the amount available to them. Similarly, secondary and fund of fund strategies depend on market availability and the capacity of other managers and allocators to execute transactions. Multi-manager strategies and strategies without guaranteed deal flow rely on third parties for capital deployment and information access, which can limit visibility into pipeline, valuations, and exits, making efficient portfolio management more challenging, in our view.
