Evergreen funds: A compelling tool for private market asset allocation

Both institutional and private wealth investors have increased their allocations to private market assets, seeking to capture the return and diversification benefits these investments can offer. Understanding the principal means of accessing private markets—evergreen funds and traditional drawdown funds—is essential to achieving an investor’s goals. Each structure can provide certain benefits, and we believe a wide range of investors may find that combining the two is the optimal approach. Both types of vehicles can be evaluated based on their return profiles, liquidity, flexibility and operational profiles.

MOCC as a common return measure

Most investments are measured by their total return over a specified period. Evergreen funds can be appropriately measured on that basis and fairly compared with stocks, bonds, ETFs, mutual funds and traditional assets that have simple cash flow profiles.

Drawdown funds are often evaluated by their internal rate of return or IRR, a money-weighted measure well-suited for investments with irregular cash flows that may vary significantly across different investments.

When comparing the performance of these two types of funds, the multiple on committed capital or MOCC can be used. The MOCC is an effective metric that measures the return on the capital committed by investors and offers a clear indication of the return generated on the total capital committed, regardless of the actual timing of inflows or outflows.

Figure 1 demonstrates the IRR evergreen and drawdown funds would need to achieve to provide the same MOCC. An evergreen fund would need to generate a return of only 9% to reach an MOCC of 2.4x, while a drawdown fund would require a 14% IRR. This comparison underscores the benefits of keeping capital at work. However, evergreen funds investing in the same assets would not generate as high an IRR as drawdown funds because they typically have some form of liquidity buffer, which drags down returns.