Thanks for this! Perpetual funds or open-end funds have been an interesting topic in recent years. There was a lot of appeal because of the perceived liquidity the structure provides (subject to any initial lockup period) but you’re ultimately in the hands of the manager’s ability to manage redemption requests. When rates shot up at the end of 2022, there was a massive redemption queue for open-end real estate funds - a lot of people wanted out but couldn’t. Important to understand how redemptions are managed and the risk of not being able to redeem. Seeing a lot of LPs hesitate with open-end funds now…they realized they may not be as liquid as they thought.
Would add that I’ve seen RIAs managing retail capital increasingly more receptive to closed-end funds under a traditional 10-year fund life that have modeled shorter hold periods to start distributing meaningful capital in years 5-7. Through diligence and reviewing model assumptions, they can build greater conviction in having substantial capital returned in a ~6 year period, and avoid some of these issues with open-end funds related to valuation and redemptions (which are fresh wounds for many investors).
Thank you for the insightful additions. Yes, I think the "run on the bank" risk continues to afflict into the present day. In some anecdotal capacity, I have seen that many RIAs continue to be skeptical of private markets partly because of a literacy problem, and partly because of an additional layer of fees their clients (who also may require literacy) have to take on. Though RIAs are consolidating as well, so maybe that can address the knowledge gap, given greater professional workforce integration.
Investors can mass panic and force a mutual fund to sell a bunch of stock when they don’t want to since there is no gate. They have to redeem in effect on demand.
Having invested in a few of these evergreen interval PE funds, to your point about redemptions, the whole idea of gating them at max 5% of NAV qtrly is to avoid trying to my to sell assets that aren’t liquid. By definition these types of funds have to keep some cash on hand so yes the retail investor will pay for a bit of cash drag. The funds would not work at all if they had open ended redemption amounts. Also, if things get real dicey, the sponsors can cut off redemptions under 5% or none at all (see BREIT for ex when rates spiked). As an investor trying to redeem you don’t want to see that happen of course but it’s another way the sponsor protects the entire investor base in a jam.
This is helpful - thanks for sharing your experiences. The SEC has been vigilant about liquidity risk management for 40 Act open-end funds for some time, and there is usually some required disclosures about such programs in the fund prospectuses too. The suspension of redemptions is indeed a delicate negotiation point, which comes to life most evidently in private fund negotiations (specifically when investors are working through a hedge fund LPA).
Love to see more on this as you do the series! Evergreen structures have become quite common even for the most illiquid of assets. It’s liquidity as long as everyone doesn’t want money back at once. I’m personally not sure what to think of it yet, since investor composition is super important there and most still have to behave a lot like traditional drawdown structures for it to work.
Thank you James! Yes, it's so unclear what much of this means. Perhaps we may think of evergreen structures as a kindred spirit to the class of "liquidity solutions" that have acquired some popularity in the past few years, including NAV lending, secondaries/continuation vehicles, etc.
Insightful article. When we worked with financial advisors, there was a lot of talk about the gap in access to private market alternatives for accredited investors. Are you seeing similar concerns around liquidity and long-term fund structures, or is most of the focus on regulatory challenges?
Thanks Taylor - liquidity appears to be a primary concern for sure. Regulation comes into play depending on the sourcing of capital (retail, AIs/QPs, etc.)
Once again, a very thoughtful analysis of a major trend that’s happening in the private markets. asset management firms are increasingly launching evergreen funds because of the steady fee related earnings they provide as well as the access to the wealth channel they open up. Can’t wait for your next post on this topic!
You are always too kind Adil, thank you. The fees part I did not even cover - thank you for touching on that. Look forward to hearing more of your thoughts!
Thanks for this! Perpetual funds or open-end funds have been an interesting topic in recent years. There was a lot of appeal because of the perceived liquidity the structure provides (subject to any initial lockup period) but you’re ultimately in the hands of the manager’s ability to manage redemption requests. When rates shot up at the end of 2022, there was a massive redemption queue for open-end real estate funds - a lot of people wanted out but couldn’t. Important to understand how redemptions are managed and the risk of not being able to redeem. Seeing a lot of LPs hesitate with open-end funds now…they realized they may not be as liquid as they thought.
Would add that I’ve seen RIAs managing retail capital increasingly more receptive to closed-end funds under a traditional 10-year fund life that have modeled shorter hold periods to start distributing meaningful capital in years 5-7. Through diligence and reviewing model assumptions, they can build greater conviction in having substantial capital returned in a ~6 year period, and avoid some of these issues with open-end funds related to valuation and redemptions (which are fresh wounds for many investors).
Thank you for the insightful additions. Yes, I think the "run on the bank" risk continues to afflict into the present day. In some anecdotal capacity, I have seen that many RIAs continue to be skeptical of private markets partly because of a literacy problem, and partly because of an additional layer of fees their clients (who also may require literacy) have to take on. Though RIAs are consolidating as well, so maybe that can address the knowledge gap, given greater professional workforce integration.
Investors can mass panic and force a mutual fund to sell a bunch of stock when they don’t want to since there is no gate. They have to redeem in effect on demand.
Thanks for the color here - yes, this principal is generally applicable to open-end funds.
And I realize (respect) that you know infinitely more about this stuff than I do considering your day job👍
Aw shucks, you're too generous. Writing about this stuff has had the Socratic effect of reminding me that I know nothing - there's so much to learn.
Having invested in a few of these evergreen interval PE funds, to your point about redemptions, the whole idea of gating them at max 5% of NAV qtrly is to avoid trying to my to sell assets that aren’t liquid. By definition these types of funds have to keep some cash on hand so yes the retail investor will pay for a bit of cash drag. The funds would not work at all if they had open ended redemption amounts. Also, if things get real dicey, the sponsors can cut off redemptions under 5% or none at all (see BREIT for ex when rates spiked). As an investor trying to redeem you don’t want to see that happen of course but it’s another way the sponsor protects the entire investor base in a jam.
This is helpful - thanks for sharing your experiences. The SEC has been vigilant about liquidity risk management for 40 Act open-end funds for some time, and there is usually some required disclosures about such programs in the fund prospectuses too. The suspension of redemptions is indeed a delicate negotiation point, which comes to life most evidently in private fund negotiations (specifically when investors are working through a hedge fund LPA).
Love to see more on this as you do the series! Evergreen structures have become quite common even for the most illiquid of assets. It’s liquidity as long as everyone doesn’t want money back at once. I’m personally not sure what to think of it yet, since investor composition is super important there and most still have to behave a lot like traditional drawdown structures for it to work.
Thank you James! Yes, it's so unclear what much of this means. Perhaps we may think of evergreen structures as a kindred spirit to the class of "liquidity solutions" that have acquired some popularity in the past few years, including NAV lending, secondaries/continuation vehicles, etc.
Insightful article. When we worked with financial advisors, there was a lot of talk about the gap in access to private market alternatives for accredited investors. Are you seeing similar concerns around liquidity and long-term fund structures, or is most of the focus on regulatory challenges?
Thanks Taylor - liquidity appears to be a primary concern for sure. Regulation comes into play depending on the sourcing of capital (retail, AIs/QPs, etc.)
Makes sense. Appreciate the insight. Can’t wait to read your next article
Once again, a very thoughtful analysis of a major trend that’s happening in the private markets. asset management firms are increasingly launching evergreen funds because of the steady fee related earnings they provide as well as the access to the wealth channel they open up. Can’t wait for your next post on this topic!
You are always too kind Adil, thank you. The fees part I did not even cover - thank you for touching on that. Look forward to hearing more of your thoughts!