Pedro Silva, Pemberton’s head of product strategy, lets out a wry chuckle when asked to define evergreen funds.
“It is interesting, because as things have been evolving over the past few years, there are now different definitions of evergreen,” he says.
Firstly, Silva explains, there is more than one type of evergreen fund. “The evergreen concept, in my mind, is still something I would associate first with a closed-ended fund but with a longer investment period, which allows individuals to continue to reinvest. But a lot of people also associate evergreen with open-ended and semi-liquid funds.”
The majority of what Pemberton has in the evergreen space is in the form of separately managed accounts (SMAs) dedicated to one specific LP or a small number of LPs, and our survey results show that the main driver for general partners using evergreen is indeed, investor demand.
This investor demand, particularly over the past two to three years, aided by firms maturing their evergreen offerings, is why Pemberton initially moved into evergreens.
“It was mainly investor demand, as they become more used to this market and are thinking what is the best way to access evergreen, especially in private debt, which is a high-yielding strategy. There is a good rationale to keeping it locked in while you can continue to reinvest automatically through that longer period.”
“It has definitely been attractive, evergreen funds provide more optionality. For institutional investors, they are still in closed-ended but with an extended investment period and the ability to mix different strategies within that same structure.”
Silva describes semi-liquid open-ended evergreen as a “gamechanger”, especially “now that investors have the ability to access such strategies with some form of liquidity. “It’s not the same as open-ended fund liquidity,” he says, “but it is still a great compromise.”
He also stresses the benefits of the simplicity that evergreen brings, “for investors, it means they can maintain an allocation target and have continual reinvestment without having to underwrite or conduct due diligence with other funds, or to go again through the same legal processes and spend money,” he explains.
“While for us it’s helpful as we keep a more permanent source of capital and allocation and it simplifies things as you don’t need to create structures so often.”
Although Pemberton initially moved into the evergreen space to meet investor demand, it has since become an area that is increasingly attractive and has helped to set Pemberton apart.
“It’s a general trend and there are more and more requests in this area, so it is a key differentiator for us and strengthens our competitive position by being able to offer such structures. At the same time, for the firm it is a more permanent source of capital, so it’s a win-win situation.”
Asked what Pemberton offers in the evergreen space, Silva mentions the range of evergreen SMAs, as well as a product launch in collaboration with Zurich on the semi-liquid open-ended side, which he says is gaining traction.
Pemberton is hoping, in future, to further capitalise on the interest in the evergreen space by setting up a fund with an evergreen structure, putting it firmly in the 88% of general partners that our survey found foresee uptake in more evergreen structures in their portfolios.
When asked about the challenges of evergreen, Silva highlights the importance of growing demand for evergreens, “it’s important to ensure that as it is put in place there is enough volume to justify the creation and maintenance of such a structure, so you need to ensure you are successful”.
He then cites the two issues that came up most frequently in our survey, especially in the wealth focused semi-liquid open-ended side: cash management, and fund structuring and legal complexity. Evergreen funds require proper liquidity, or cash management and “operationally, you need to be ready to do that effectively.”
Another challenge is that “you may require enhanced licensing for your structures to go all the way to the end investor.” However, these issues, he believes, are already being overcome with good technology solutions and they will continue to decline in relevance as evergreen semi-liquid continues to grow and firms dedicate more of their time, will, and resources to focus on wealth solutions. This is “already happening as we speak,” states Silva.
This interview by Luke Beacon was first published as part of a major Evergreen Funds Industry Survey, produced as a collaboration between Funds Europe and Citco. The full report may be viewed here.
