Once the exclusive domain of institutions and family offices, managers are increasingly bringing these versatile and valuable investment products to the wealth channel.
While the institutional and individual markets are of similar size, access to private markets had been largely limited to institutions and family offices. Now, through product innovation and a willingness of institutional managers to bring products to the wealth channel, individual investors are accessing these versatile and valuable tools.
With the emergence of evergreen funds, investors have a wide range of options when building portfolios with private markets. When considering how best to access private markets, one of the first considerations is what vehicle type is the most efficient and appropriate for an investor to meet its desired goals: evergreen, drawdown or both?
Product innovation has dramatically expanded the aperture of investors in private market funds. According to Capgemini, global high-net-worth (HNW) wealth increased 4.7 per cent, and the number of HNW households increased 5.1 per cent in 2023, fuelled by strong stock market returns and stabilising economies.
North America led the way with 7.2 per cent wealth growth and 7.1 per cent population growth, followed by Asia-Pacific (4.2 per cent and 4.8 per cent) and Europe (3.9 per cent and four per cent).
The first generation of private market funds were structured as limited partnerships and were available to institutions and family offices at high minimums and limited liquidity. These funds “called” capital as opportunities were sources, often over several years, and delivered K-1 tax reporting.
These funds worked fine for institutions and family offices that typically had longer time horizons, met the accreditation thresholds and had no concerns about liquidity. However, their structures were challenging for HNW investors who often didn’t meet the accreditation level and were concerned about the high minimums and limited liquidity and did not like the fact that K-1s were often late and restated.
These funds are referred to as “drawdown funds”, describing how capital is drawn down and deployed. To address the high minimums of drawdown funds, we began to see “feeder funds” coming to the market, with lower minimums ($US100,000), but they were still limited to qualified purchasers.
Feeder funds generally have similar structural features as drawdown funds. In recent years, there has been a proliferation of evergreen funds coming to the market at lower minimums, more flexible features and available to accredited investors or below ($1 million or more in investable assets).
These funds are referred to as evergreen or perpetual, describing the fact that they are generally available for investment. A drawdown fund is available for a finite period.
Evergreen funds include such vehicles/structures as interval, tender-offer, private BDCs, non-traded REITs, UCITs, SICAVs and CITs, among others. They are registered with the appropriate regulatory body (Securities and Exchange Commission, Financial Services Authority, etc.) and therefore have certain protections and regulatory obligations. These funds may also be referred to as “registered funds”.
Investment and operational considerations
When assessing the private markets, there are several considerations that need to be accounted for, including investment outcomes, liquidity management, operational burden and timing.
Historically, institutions and ultra-HNW families with experience and familiarity with some of the operational hurdles have used drawdown funds.
There are three elements that need highlighting:
- Subscriptions: This vehicle uses a committed capital subscription approach. When an investor allocates to a drawdown fund, their capital is only used (“called”) when the general partner (GP) has identified deals to allocate to. This means an investor will have to ensure they have the capital readily available when it is needed.
- Term: A drawdown fund has a finite investment period. As assets mature the capital is paid back to investors. Once all assets have matured, the fund is closed. So, if an investor wants to allocate to a manager, they will need to wait for the next fund and re-do their investment and operational due diligence.
- Redemptions: There is no opportunity to redeem from these funds, and the investor is only returned capital when assets mature.
Evergreen funds have emerged to address some of the challenges associated with drawdown funds and to align with how advisers allocate across their practices. These funds are generally available to most investors, and capital is put work upfront rather than being drawn down over several years. Consequently, from an asset allocation perspective, investors gain full exposure to the asset class rather than building over several years.
Combining evergreen and drawdown funds
With the emergence of evergreen funds, institutions and family offices have begun to use both structures in building and managing portfolios.
Evergreen funds provide immediate access to the asset classes, while the drawdown fund will take several years. Evergreen funds can also be used to maintain exposure as distributions are made. Accessing private markets through an allocation to both evergreen and drawdown funds can provide an optimal outcome from both an operational and investment perspective.
HNW families may use both structures, with children and trusts opting for evergreen funds due to accreditation, and larger pools leveraging drawdown funds.
These funds also provide more flexibility in getting investors comfortable with these newer investments rather than the compressed timeframe of drawdown funds’ subscription period.
We believe that a combined allocation to evergreen and drawdown funds represent an efficient way for an investor to gain exposure to private markets.
