Generali Asset Management offers a different perspective on evergreen funds, as it
is among the 24% of general partners that our survey found have not yet offered
such funds.
However, other affiliates of Generali Investments Holding are exploring the launch of
evergreen funds, primarily focused on Semi-Liquid Private Debt strategies.
When asked to define evergreen funds, Marco Busca, Generali AM’s Head of
Indirect Private Debt, explains that their structure is theoretically very simple.
“However, it can become overly complicated depending on the liquidity clauses
included, such as allowing 5% of the NAV to be withdrawn every quarter, often with
an annual cap of 12.5%.”
Busca explains that the benefits of evergreen funds are numerous, but their
relevance depends on the type of investor. “For clients with an experienced
investment team and strong selection and due diligence capabilities, periodically
renewing the portfolio allocation to drawdown funds is not an issue.
The ability to manage the difference between the committed amount and the
deployment reached by the portfolio of funds becomes less relevant if the portfolio is
mostly composed of evergreen funds. These funds, after reaching full ramp-up, will
not enter the harvesting/reimbursement phase. A similar concept applies to
managing the J-curve of a Private Debt fund-of-funds portfolio, potentially smoothing
it with the utilization of evergreen funds.
“When discussing liquidity provisions, the “liquidity windows” offered by an evergreen
fund are less significant for sophisticated and sizeable institutional investors with
detailed strategic asset allocation and well-defined illiquid buckets. For smaller or
retail investors, these windows are more relevant. However, it is important to note
that in the event of a sudden and deep credit downturn, the liquidity features of any
evergreen fund cannot accommodate the simultaneous exit needs of multiple
clients.”
When asked about the performance of evergreen funds, Busca explains that they
generally underperform compared to drawdown funds due to the “cash drag”
phenomenon. This aligns with the experience of 26% of limited partners in our
survey, who identified lower returns as a significant ‘pain point’ for evergreen funds.
These lower returns, Busca notes, are primarily because evergreen funds must
maintain a liquid portion of their investments, a requirement that closed-ended funds
do not have.
He further explains other drawbacks of evergreen funds, including the frequent
absence of clawback provisions. These provisions require the general partner to
return a portion of previously received performance fees if the fund performs poorly.
Additionally, calculating performance fees can be complicated because the fund
does not have a defined maturity, a pain point shared by many other general
partners according to our survey.
So, are these the reasons why Generali AM does not offer evergreen funds? “Not
exactly”, says Busca. “It is more about the type of clients you want to target.” Busca
believes that both push and pull factors are involved in the establishment of
evergreen funds. While investor demand is indeed a key driver, as our survey
suggests, he also notes that such funds are attractive to general partners because
they allow them “to reach different types of clients.”
Despite this, Busca agrees with our survey respondents and views evergreen funds
as a trend and an area of growth, though not yet for Generali Asset Management. “I
believe the spread to new clients will continue,” he says, unless a better structuring
innovation emerges.
Busca describes the impact of evergreen funds as an “evolution” in the market,
noting that “five years ago, there were only drawdown funds.” However, when asked
if capital will ever predominantly shift to evergreen funds, he says no, as “many
institutional investors will maintain their preference for drawdown funds, at least in
Europe.”
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.
