Private market fund managers are increasingly converging with private wealth platforms to bring illiquid funds to personal investors, typically in the form of a semi-liquid ‘evergreen’ fund structure. Where is this trend heading? I spoke to experts from EQT, Rothschild, UBP, and StepStone Private Wealth to learn more about how they’re trailblazing in this arena.
Over the past decade, aggregate assets under management of private markets evergreen funds has more than quadrupled to $430 billion. By 2025, Boston Consulting Group expects high-net-worth individuals will have 2.4x more assets in private equity funds than in 2020.
This is set to become the next big strategic push for GPs but the table stakes are high – far from being a simple exercise, private wealth advisers are warning GPs that evergreen funds are a complex, costly, operational undertaking.
“There are roughly 16,000 companies listed on stock exchanges and about 140,000 companies with a revenue above $100 million that are non-public. So if you want to participate in that opportunity set, you have to go private. The ecosystems of mutual funds and closed-ended private market funds are converging,” says Peter Beske Nielson, Partner and Global Head of Private Wealth, EQT.
IMpower | FundForum, the world’s largest global investment event for wealth management, will be applying its biggest focus yet to this convergence trend. Famous as the meeting place for global CEOs, CIOs from asset management, IMpower has built on its 30 year reputation bringing together over 400 of the crème de la crème of European fund buyers from private banks, family offices, insurers to launch a dedicated stage on Private Markets for Private Wealth.
“As the leading event bar none for wealth management, IMpower | FundForum has gathered the most impressive cohort of leading European private banking and family office LPs” Jenny Adams, Global Executive Producer, IMpower | FundForum
In addition to over 1,400 global attendees, over 65 GPs and LPs will be participating on the private markets programme. As many within the wealth management industry acknowledge, understanding the value proposition of semi-liquid funds will be crucial over the coming years, when advising clients. This year’s 2-day programme will seek to educate and demystify private markets funds.
“Our clients are entrepreneurs so it was quite intuitive to help them invest part of their wealth in private markets,” says Jessica Sellam, Managing Director, Rothschild & Co Wealth & Asset Management. “It fits their risk/reward profile. Also, private equity has been an outperforming asset so they’ve been interested in having exposure to this asset class in their portfolio.”
Wealth manager Rothschild has been offering closed-ended fund solutions for many years, over which time it has built a stable of 60 different funds. The majority are small, medium and large private equity buyout funds, says Sellam. “Then we have approximately 20% in direct lending and 10% in infrastructure; this is the youngest part of our offering where we see significant opportunities. We are increasing our exposure to infrastructure year after year.”
She says that Rothschild are increasingly considering semi-liquid evergreen funds but don’t yet offer any.
At Union Bancaire Privée, they are already doing so. The bank has five solutions on its platform and expects to add two more over the coming weeks. One will be a generalist PE solution with a focus on secondaries and co-investments, the other will be a European direct lending solution.
“We think semi-liquid funds could become a real game-changer for adding private market allocations to clients’ portfolios,” says Gaetan Aversano, MD, Deputy Head, Private Markets Group, UBP.
Evergreens have been designed to address a number of hurdles for private investors. These include illiquidity, complexity of drawdown structures, and high investment minimums.
Some private market managers like Partners Group were early adopters of such structures. Most firms, like EQT, are only two years or so on their journey; this is still early days and the educational drive will be vital to the long-term success, as wealth advisers learn the risks and benefits of such funds.
At EQT, they have developed relationships with global banks to offer closed-ended solutions to UHNW investors and on 1st June 2023, they launched their first private equity evergreen fund: EQT Nexus. An infrastructure fund is planned later this year.
“We started developing relationships with top global banks (UBS, Morgan Stanley etc.),” says Beske Nielson. “Now we are also developing relationships with tier 2 and tier 3 institutions, such as St. James’s Place and Hargreaves Lansdowne in the UK. We are also having discussions with a number of digital participants in our ecosystem such as iCapital and TitanBay and Moonfare, who enable private markets access to individual investors.”
StepStone Private Wealth have created three products thus far “Each of these funds invests primarily in secondaries and co-investments within their respective private markets asset classes,” explains David Beamish, Member, Infrastructure and Real Assets Team, StepStone Private Wealth. “Each offers monthly admittance and quarterly liquidity for a portion of the fund’s assets.” When it comes to product development, Beamish says that there are three main themes: convenience, efficiency and transparency.
Beske Nielson says that EQT’s approach to designing Nexus was to replicate the same way that pension funds have accessed private equity over the last 30 years:
“The EQT platform is quite wide now in respect to our closed-ended funds. Nexus will allocate to venture, growth equity, buyouts and co-investments. It is a Luxembourg SICAV fund. As a client, you buy one unit in the SICAV, instead of subscribing to all of the underlying funds (including co-investments). If you buy a share in Nexus, you get a diversified allocation to private markets.”
Wealth managers are applying a laser focus to due diligence before they consider entering into distribution partnerships with GPs, given the risks associated with semi-liquid funds. Some of the key considerations to centre on:
- Liquidity management
- Valuation policies
- Fee structures
- Portfolio construction (asset quality)
- Marketing proficiency
At Rothschild, as they consider semi-liquid products the liquidity feature is less of a concern. A feature of greater interest, says Sellam, is that of a single drawdown.
“When you’re invested in a closed-ended fund you have to do something with cash while waiting for capital calls. In an evergreen fund, you don’t have this issue. You put 100% cash to work on day 1. I think this will encourage subscriptions from larger clients not only from retail clients.
“In semi-liquids, as part of your due diligence there are other things to look at such as the seed portfolio, the way fees are calculated. But I think the main risk lies in miss selling. If it is not completely aligned with a client’s investment objectives you’re going to have an exit door; the day you want to get out of the fund you won’t be able to do so. The main thing is being very careful explaining to a client how the fund can be used in their portfolio.”
In Aversano’s view, liquidity management is vital. What are the liquidity sources to meet redemption requests, and are they disclosed transparently to investors? How much liquidity is expected to be generated through portfolio distributions and proceeds? And in a stress case where fundraising stops, how robust is the portfolio management team?
“The valuation policy is also a critical due diligence area,” he says. “As investors can typically come in and out on a quarterly basis, the fund NAV needs to provide a fair and accurate view of the underlying portfolio valuation. We need to understand what the different stages of the valuation process are and whether there is oversight by non-investment partners to avoid potential conflicts of interest.”
Portfolio construction is also key. Is it adequately diversified and constructed in a way that is suitable for an open-ended format?
“Within private equity, secondaries and co-investments are probably better suited to an evergreen structure than primaries as they have a shorter duration with quicker drawdown, and distributions are likely to be made earlier on. We also look at the fund’s investor base – is it only catering to wealth management clients or does it also have institutional investors?” adds Aversano. Beamish says that they get a lot of questions on liquidity from potential distribution partners.
Beske Nielson concludes by saying that another key question asked by wealth platforms is: ‘What are we getting exposure to and how is it sourced?’ “There is a fear that with an evergreen fund you get the leftovers, the scraps. It will take a few years before all allocators get comfortable with and understand the benefits of evergreens.”
Jenny Adams concludes, “with the greatest concentration to date of leading LPs and GPs in private markets for private wealth, IMpower | FundForum is the place to be if you want to build new wealth relationships and influence the evergreen agenda.”
