How can this be? An evergreen vehicle is fully funded from day one to provide immediate exposure to a diversified portfolio. When capital is invested from day one, it begins compounding returns faster than a drawdown fund and results in a higher average allocation to private equity over a 10-year period, leading to higher compounded returns.
Evergreen vehicles offer a compelling proposition to individual investors who generally do not have access to a wide range of managers and the scale of capital needed to pursue more complex allocation and cash management strategies. Larger institutional investors often mitigate the “cash drag” problem by oversubscribing or having a team monitoring capital calls and reinvestments, but for individual investors with limited resources, an evergreen vehicle can be a more efficient way to stay invested in private equity.
3. Evergreen vehicles can potentially complement traditional drawdown funds.
Blending drawdown and evergreen vehicles may produce higher compounded returns and lower risk both in terms of reinvestment and diversification for individual investors, in our view. Unlike larger institutional investors, many individual investors are not able to access a wide enough set of drawdown vehicles to fully maximize their private equity allocation, often resulting in an underweight and concentrated portfolio focused on a handful of sectors, strategies or geographies.
In addition to allowing immediate compounding and a higher average allocation to private equity over a 10-year period, an evergreen vehicle will continue to acquire new portfolio companies after an investor invests in the vehicle under most circumstances. A growing portfolio of companies can bring material diversification benefits to a private equity portfolio, allowing investors to take advantage of many different vintages.
Investors may also use evergreen vehicles as a capital management tool. As drawdown funds produce realizations, investors can reinvest the proceeds immediately into an evergreen vehicle to maintain their desired allocation to private equity (Exhibit 3). As discussed earlier, maintaining a higher allocation to private equity over time can lead to material outperformance in both the short term and long term (Exhibits 2a and 2b).
Investors may wish to consider placing the evergreen vehicle as a “core” part of a private equity allocation allowing for a baseline level of deployment and diversification, while a “satellite” allocation to drawdown funds allows investors to diversify and gain additional exposure to different kinds of managers, strategies, or regions.
EXHIBIT 3: Blending Drawdown and Evergreen Structures Could Produce Higher Compounded Returns Over Time.
Leave a comment