What’s in Your Evergreen Private Equity Strategy?

Key Takeaways:

• As the number of evergreen private equity vehicles has increased over the last few years, so have the number of approaches to the asset class.
• Some evergreen private equity vehicles offer pure-play private equity exposure, while others are better described as multi-strategy private equity or multi-asset class given their exposures to secondaries or other asset classes across private markets, respectively.
• Some evergreen vehicles are focused around a single manager, meaning that they rely on their own deal flow and back their own track records. Others are described as multi-manager vehicles which, to varying degrees, tend to rely on the deal flow and track records of other managers. Even some single-manager strategies have exposure to other managers via secondaries positions, placing them in a mixed category rather than private equity.
• For true single-manager strategies, depth and breadth of deal flow is required to execute and diversify. These strategies may benefit from priority access to deal flow, meaning that they invest alongside a manager's institutional strategies into the same deals at the same time.
• Not all strategies are created equal, whether pure-play vs multi-asset, or single-manager vs multi-manager. Knowing the details of a strategy’s underlying investments, as well as how they are sourced and managed, can help investors choose a strategy that fits their goals and objectives.
• Ultimately, evergreen vehicles that are run by a single manager and that invest in pure-play private equity will have the most control over the underlying assets. This, in turn, gives them more control over generating investment outcomes and arguably provides the most effective way for investors to experience the potential benefits of private equity (Exhibit 1).

EXHIBIT 1: Evergreen Vehicles Vary in Exposure to PE and Control Over Underlying Assets

Types of Evergreen Vehicles, Exposure to PE, and Control Over Underlying Assets

Given the dispersion of returns in private equity between the best and worst performing managers, manager selection is critical. Top-performing managers have historically earned 14% higher returns than bottom quartile performers. However, evergreen strategies present additional layers of diligence and decision-making to work through before investing. With the advent of different types of evergreen private equity strategies in recent years, investors face the added complexity of understanding precisely what they are investing in, including the investment sourcing and portfolio construction approach an evergreen vehicle employs. Those interested in evergreen structures may want to consider two more important questions about the underlying investments as they do their diligence.

Question 1: How much actual private equity is in the vehicle?

Some evergreen vehicles contain only private equity investments, plus a relatively small set of liquid assets to manage liquidity. Some claim to provide pure private equity exposure but adopt what we believe is an overly broad definition of the asset class. Others are better described as multi-asset strategies that invest across private markets.

Question 2: How are the underlying investments in the vehicle sourced, managed, and valued, and who ultimately controls their outcomes?

This is where it becomes critical to understand the differences between single-manager and multi-manager strategies.