Leading investment managers such as KKR hold the view that blending evergreens and drawdown funds have the potential to produce higher compounded returns and lower risk, both in terms of reinvestment and diversification for individual investors. Again, there is no suggestion that private wealth views evergreen products as a panacea.
As the ecosystem develops, they will need to be used carefully, with a key focus on the manager’s track record being just one of a host of due diligence considerations, including liquidity management, quality of investment platform and deal flow, education/ongoing engagement and scalability.
This could require some degree of discipline on the part of private markets firms to ensure that the industry does not end up with a deluge of evergreen products that fail to scale up – this presents a tangible risk to private banks as they develop distribution partnerships and could lead to repetitional risk both for GPs and distributors. Indeed, it was noted during IPEM by Agathe Bubbe, Director – Wealth Solutions, Investor Relations at Eurazeo, that while evergreens are a fundamental change for the market, “not all strategies are suited to these products…scalability is a necessity.”
Controlling the supply side, in order to properly meet demand in a considered fashion, is something that wealth platforms and GPs are likely to monitor closely. There will, as with any structural trend, be those who look to jump on the bandwagon.
One only has to look at the greenwashing risks that have arisen in response to sustainability-focused funds, with mis-characterization of ESG investment objectives, to understand that the same risks could equally arise with evergreens; perhaps “evergreen washing” will become a term that enters the industry vernacular in the near future. Evergreens that launch with limited appeal and experience stagnant AUM growth are likely to be detrimental to all concerned: it would be, quite simply, a ‘bad look’.
Live polling at IPEM found that the ability to provide tailored investment solutions was regarded as the most important factor to developing a successful distribution partnership. What this underscores is the need for GPs to do their homework before considering whether to launch an open-ended product. Does the strategy have sufficient scope and deal access to handle the unique demands of a quarterly redemption vehicle? And even if it does, does the manager’s brand, internal architecture and overall value proposition resonate with wealth partners? This is the key point: any new evergreen fund has to meet a specific investment objective for private wealth for it to succeed, and avoid scaling issues.
