EDHEC: Evergreen, the tree that never sheds
By Evan Clark, Senior Private Market Analyst, EDHEC Infrastructure & Private Assets Research Institute
Evergreen private equity funds have grown rapidly in recent years, targeting wealth, retail, and increasingly, defined contribution (DC) pension plans. These vehicles promise access, convenience, and periodic liquidity, but closer analysis reveals structural features that pose material risks for investors.
US-based evergreen vehicles had amassed approximately $ 380 billion of AUM by end 2024, with some $ 70 billion of that focused on private equity. This remains small relative to total private capital AUM of $ 15 trillion and private equity AUM of $ 5 trillion but is more meaningful relative to secondaries AUM of $ 450-$500 billion.
An EDHEC Infra & Private Assets (EIPA) publication, ‘Evergreens: The Tree That Never Sheds,’ takes a closer look at performance, risk, and valuation practices in private equity evergreens.
Key Observations
- Evergreen fund performance is driven by unrealised gains: since 2021, more than 70% of gains across SEC-registered evergreen funds remain unrealised. For newer funds, that figure can exceed 90%. Reported returns are often inflated by quick markups on secondaries’ transactions. Heavy reliance on secondaries and the use of Net Asset Value (NAV) as a practical expedient create the appearance of strong, low-volatility returns, often driven by unrealised gains and in-quarter write-ups. There is a long history of blowups for investment products that promise the impossible: high returns and low volatility.
- Fees are misaligned. Management fees are charged on NAV, and in some cases, incentive fees can be crystallised on unrealised gains without clawbacks. All-in annual fees can approach 300–600bp, consuming a substantial share of gross returns. Fee structures that crystallise on unrealised gains risk misalignment between managers and investors.
- Risk-adjusted performance seems illusory: evergreen funds report low volatility, low drawdowns, and high Sharpe ratios, largely due to general partnership (GP) reported NAV smoothing. When compared to listed PE investment trusts – which trade at deep discounts and exhibit far higher price volatility – evergreen results appear ‘too good to be true.’
- There is a liquidity mismatch: these funds suggest 5% quarterly tenders (20% annually) but may rely on inflows and distributions to meet redemptions. In stressed markets, this structure risks gating or forced sales – outcomes already familiar in private REITs. Liquidity management challenges expose investors to structure risks that could impair unit values.
- There are governance conflicts: by investing alongside closed-end funds, evergreen vehicles can dilute negotiated size caps and compete with limited partnerships (LPs) for co-investments. This weakens Limited Partnership Agreement (LPA) protection and may lead to conflicts. The relationship between evergreen funds and institutional LPs is therefore a real concern. Caps on fund sizes and allocation of deals are top of mind. An uncapped evergreen fund co-investing with a hard capped drawdown fund effectively uncaps the overall pool of capital. GPs may find themselves having to make concessions to one or the other. If an evergreen fund were to lose access to deals, pay higher fees for co-investments, or face changing secondary market activity, the model may be impaired.
Conclusion
Evergreen funds may remain an important innovation in broadening access to private equity but without improvements in disclosure, fee alignment, liquidity planning, and governance, investors risk overpaying for returns that rely heavily on accounting practices rather than underlying operational performance.
A single high-profile failure could undermine confidence in the entire market. As evergreens expand into DC channels, the stakes for improved governance and disclosure are rising.