Although evergreen funds can provide a convenient way to gain periodic liquidity while investing in private markets, investors must be very cautious when entering the market, according to a senior executive at a London-based family office.

There has been a steep rise in evergreen funds of late, with assets more than doubling to $500 billion since 2022, according to PitchBook. The data provider defines evergreen funds as “interval, tender offer funds, unlisted BDCs, unlisted REITs and other perpetual-life vehicles” that “offer continuous subscriptions at NAV, periodic liquidity, and streamlined tax reporting.”

The push for democratization of the private markets has helped to spur interest in evergreen funds as a way for managers to offer private market access to retail investors. There has also been an uptick in interest from family offices that are looking for steady cash flow, flexibility, and liquidity within their portfolios and want private market access without the burdens of long lock-up periods.

However, investors should be aware that evergreen funds change the dynamics in both private credit and private equity markets, the family office executive warned.

“It is good, but you really have to be careful about which funds you go into, make sure you fully understand the terms in which you can take money out if you need to, and that the GP hasn’t retained the right to put up gates willy nilly,” they said. “Be very careful and don’t be a sheep.”

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For example, the ability to withdraw funds on a periodic basis means the underlying assets within the fund have got to be mark-to-market to ensure consistent valuations.

“I don't think people think about the knock-on effects of evergreen funds or the way that they work in practice,” the executive said. “In order to really work, evergreens have to keep some of their capital back and ready to pay out, which means that they’re not investing it.”

This opportunity cost means that IRRs are going to be naturally lower, unless evergreen funds increase their leverage, which is also not favorable, they added.

“It all works incredibly well when everyone’s piling into private equity or private assets, and all sorts of money is coming in,” the family office executive said. “But they haven’t ever had to pay out, and as soon as the penny drops, what was previously a virtuous circle quickly becomes a vicious circle.”