Asset managers looking for novel investment vehicles to capture trillions of dollars in fresh capital are increasingly turning to semi-liquid approaches to meet the evolving needs of retail and institutional investors who want to participate in private markets while maintaining some liquidity.
Enter evergreen funds
Evergreen structures are one type of semi-liquid fund that has gained popularity recently in private and public markets. While definitions and structures vary, evergreen funds provide investors with elements of open-ended and closed-ended funds, allowing investors to make long-term investments while retaining the option for continuous investment and periodic liquidity. Evergreen funds generally give investors the option to buy or sell during preset windows, and with the potential for limited lockup periods, capital may be added or withdrawn as permitted.
While offering unique investor benefits, evergreen funds inherently bring a host of complex operational challenges for asset managers to navigate throughout the fund cycle. For example, rather than managing a handful of institutional investors, evergreen funds can require asset managers to quickly and accurately calculate performance and management fees for upwards of thousands of investors – each at different rates – and determine a range of appropriate waterfall and carried interest approaches for a perpetual fund structure.
Why Now?
The recent interest in evergreen funds stems largely from the flexibility these structures provide asset managers to respond to market conditions and manage their funds. Managers understand that retail investors, with the potential to bring more than US$1 trillion into private markets, are not as comfortable as institutional investors in locking up capital for lengthy periods and want the flexibility to redirect capital as market conditions change. Likewise, institutional investors see the flexibility of evergreen funds as a way to periodically capture new opportunities without locking up funds for long periods. In addition, institutional investors, per regulatory requirements, are limited in terms of the number of closed-ended investments they may participate in. An evergreen structure helps address this limitation and increase investor commitment.
However, these attractive features come with significant operational complexities. These unique structures require a tailored administrative approach, utilizing trusted technology in combination with customized services and fit-for-purpose operational processes. MUFG Investor Services has partnered with clients to support semi-liquid funds for nearly a decade.
Our team offers insight derived from deep market experience and develops the necessary customizations for each evergreen fund. Discussions with asset managers often begin by focusing on how we can support their operational needs as they evaluate whether an evergreen fund structure fits their investment strategy. Technology is already built to support open-ended and closed-ended funds at every stage, and these systems can be successfully tailored to meet the specific needs of evergreen funds.
The factors that attract investors to evergreen funds are the same considerations that pose challenges to asset managers and complicate business-as-usual (BAU) operations. While capital commitment and drawdowns are common features, determining drawdown allocations becomes complicated as the traditional calculation (based on commitment or queue system) is not always the best fit for each evergreen structure.
Cash and liquidity management needs are heightened due to increased inflows and outflows with no fixed maturity date. Redemptions are increased, and NAV and investment performance calculations must be run more frequently. Investor operations including onboarding, AML/KYC, and transfer agent activity are intensified given ongoing opportunities for additional fundraising. In addition, matching liquidity between investors and investments becomes a challenge, especially when compounded by slow pay provisions or lock-in periods.
Experienced fund administrators play a critical role in assisting asset managers with evergreens. Speed to market is critical and identifying the necessary administrative approach isn’t always obvious. Asset managers understand that partnering with providers who can automate front-, middle-, and back-office services will save time and create efficiencies.
For example, an MUFG Investor Services team recently met with an asset manager who was faced with a complicated evergreen fund structure, which was in turn complicating performance and management fee calculations. This included different start dates, rates and bases with varying rebates. During an initial meeting, our team custom fit a solution – right in the room – leveraging existing platforms and processes to solve for the manager’s pain points.
Often, discussions with asset managers explore investment strategy goals, potential downstream impacts, and considerations for strengthening operational infrastructure. If an evergreen structure fits the bill, questions such as, “How will allocations and reallocations be handled? Will equalization be offered?” take on new importance.
Automation is key across fund cycles and tailoring services without manual intervention reduces the margin for error and mitigates risk. Our integrated automated payments and settlements platform provides solutions for slow pay and full redemption. The ability for slow pay with evergreen funds is an important tool for asset managers, given the increased liquidity opportunities. Our teams also have experience assisting with complex redemptions unique to each evergreen structure.
Clients are using our cutting-edge fee calculation tool to run waterfall, carried interest modeling, and performance fees – both hypothetical and realized – per investor in the fund. Whether there are 10 or 1,000 investors, having reliable, investor-level information is paramount for asset managers to manage their funds and for investors to have disclosure and transparency. This is critical for evergreen investors, who may have relied on the visibility provided in public markets.
Automating connectivity between fund accounting and transfer agency platforms allows managers to streamline critical fund activity, including allocations and equalizations. By leveraging transfer agent licenses, we seamlessly ensure ownership records are accurately maintained. For regulatory requirements, our in-country teams help support asset managers’ operational processes as they navigate jurisdiction-specific requirements, and our technology enables validated reporting globally.
As investor demands evolve, innovative fund structures – such as evergreen and other semi-liquid funds – will continue to grow and evolve alongside them. Asset managers who partner with experienced administrators will be best positioned to capitalize on the opportunities these innovative structures present while managing their inherent complexities.
