(Bloomberg) — Private credit funds are increasingly keen on structures that allow institutional investors the option of taking their money out more easily.
Firms such as Carlyle Group Inc. and KKR & Co. are among those building so-called evergreen funds, to help answer a common critique of the $1.6 trillion market — that investors are forced to lock up their cash for as long as 10 years in a single fund.
Traditional closed-end funds run on a fixed time-line. Investors commit capital and then wait for fund managers to draw down those commitments to invest in deals. Once that period of investment is up, money starts to be returned to the limited partners.
With evergreens, investors have greater flexibility over when they can withdraw or put in capital. Once invested, the cash is put to work immediately. While these funds bear some resemblance to structures popular in the U.S. — such as Blackstone’s BCRED, which targets the mass-affluent — evergreens are typically directed at institutional investors.
Andrew Bellis, head of private debt at Switzerland-based Partners Group, told Bloomberg News in an interview that these types of funds solve a lot of the inefficiencies of a traditional closed-ended structure — but they are also a lot of work to manage.
His firm was an early adopter of the increasingly popular strategy, launching its Private Loans Sicav Fund in 2016. The fund had over €1.5 billion ($1.6 billion) of assets under management, according to a Luxembourg filing from October. Comments have been edited and condensed for publication.
What explains the rise of evergreen structures for private debt managers?
The straightforward answer is the shortcomings of traditional, closed-end private credit funds, and the difficulty a lot of LPs have around managing their commitments. When you commit to a fund like that, you don’t know when your capital will be called. You also have an uncertain schedule of payment when the fund returns capital, as well as one or two assets hanging around for a lot longer.
With evergreen funds, you start benefiting immediately from the returns that accrete over time, and you don’t have to deal with multiple drawdowns. When you exit, there’s more of a process as opposed to just waiting for investments to tail off. In many ways, it’s a more efficient way to invest and manage exposure, but there’s still a number of investors that prefer the traditional model.
Is this basically a way of bringing more liquidity to the private debt markets? How do you generate that liquidity?
To some extent you are correct. Evergreens are more liquid than traditional funds that rely on distributions. There are a number of different options when structuring in order to build that liquidity. You can hold an amount of liquid debt, but the more you hold the more volatile the fund is. Or you can match subscriptions and redemptions, and in effect replace one investor with another.
Or you can have so-called run-off sleeves. When, for example, 5% of investors elect to leave, you can move 5% of every asset into a separate sleeve to run off the debt. Private credit produces regular distributions which helps this sort of mechanism.
What are some of the biggest challenges of managing evergreen structures?
It’s a lot more challenging than people might think, and I certainly don’t think that every fund manager should do it. They are more complicated to run and manage on an ongoing basis than traditional funds, particularly when it comes to the subscription and redemption side. You need to make sure you have the investments lined up when you get inflows. There are also complexities around FX and currency exposures.
Will fund managers have to disclose a lot more to their investors on valuations with evergreen structures?
Yes, overall you do fundamentally. As you are marketing on an ongoing basis, it’s critical you provide information to new investors as they need to make an informed decision on a regular basis. If I were to invest in an evergreen I’d like to know I’m investing at fair-market value and work out who’s determining this value. Evergreens hopefully push that debate around transparency further.
Should we separate the push for semi-liquid structures that cater to retail investors from evergreens?
Evergreens are often confused with retail funds like the business development companies in the United States. They overlap in that both provide certain liquidity mechanisms for investors. But the push for more evergreen vehicles is primarily focused on, and structured around, wealth managers and institutional investors.