Evergreen private equity funds have grown rapidly in recent years, targeting wealth, retail, and increasingly, defined contribution (DC) pension plans. These vehicles promise access, convenience, and periodic liquidity – but closer analysis reveals structural features that pose material risks for investors.

US based Evergreen vehicles had amassed approximately $380 billion of assets under management¹ (AUM) by end 2024, with some $70 billion of that focused on private equity. This remains small relative to total private capital AUM of $15 trillion and private equity AUM of $5 trillion² but is more meaningful relative to secondaries AUM of $450-$500 billion³.

Key Observations:

• Performance driven by unrealised gains: Since 2021, more than 70% of gains across SEC-registered Evergreen funds remain unrealised. For newer funds, that figure can exceed 90%. Reported returns are often inflated by quick markups on Secondaries’ transactions.
• Fee misalignment: Management fees are charged on Net Asset Value (or NAV), and in some cases, incentive fees can be crystallised on unrealised gains without clawbacks. All-in annual fees can approach 300–600bp, consuming a substantial share of gross returns.
• Illusory risk-adjusted performance: Evergreen funds report low volatility, low drawdowns, and high Sharpe ratios, largely due to general partnership- (or GP) reported NAV smoothing. When compared to listed PE investment trusts – which trade at deep discounts and exhibit far higher price volatility – Evergreen results appear “too good to be true.”
• Liquidity mismatch: These funds suggest 5% quarterly tenders (20% annually), but may rely on inflows and distributions to meet redemptions. In stressed markets, this structure risks gating or forced sales – outcomes already familiar in private REITs.
• Governance conflicts: By investing alongside closed-end funds, Evergreen vehicles can dilute negotiated size caps and compete with limited partnerships (or LPs) for co-investments. This weakens Limited Partnership Agreement (LPA) protection and may lead to conflicts.

Evergreen funds may remain an important innovation in broadening access to private equity. But without improvements in disclosure, fee alignment, liquidity planning, and governance, investors risk overpaying for returns that rely heavily on accounting practices rather than underlying operational performance. A single high-profile failure could undermine confidence in the entire market. As Evergreens expand into DC channels, the stakes for improved governance and disclosure are rising.

Footnotes:

¹Morgan Stanley.

²S&P Global.

³Pitchbook (2024).