Institutional and individual investors are allocating more of their capital to private debt to capitalize on the asset class’s potential for attractive risk-adjusted returns and diversification benefits.
While drawdown funds have been the traditional means of accessing private debt, evergreen funds are growing more popular: They offer a compelling alternative or complementary investment option to drawdown funds.
Private debt is well suited to open-ended fund structures owing to its reliance on contractual cash flows, among other factors.
Growing private debt evergreen offerings
As private debt markets mature, investors increasingly seek tools to help them meet their allocation targets and build their portfolios more flexibly. Private debt evergreen funds—continuously offered, subscription-based vehicles that provide immediate capital deployment and regular liquidity—present a promising solution.1
In the last five years the number of evergreen funds has nearly doubled (Figure 1).
Why choose an evergreen fund?
Private debt evergreen funds inherently provide several advantages that can benefit all types of investors.
Full and swift deployment maximizing MOCC
Private debt evergreen funds offer investors immediate, full and constant capital deployment. This ensures that investors are fully invested on day one. Not only is this attractive from a return perspective, but it also simplifies and accelerates the process of reaching target allocations. This makes evergreen funds highly effective at maximizing the multiple on committed capital (MOCC) as seen in Figure 2.2 In effect, this structure eliminates reinvestment risk on the investors’ side, as they are not required to go into harvesting, enabling them to remain at their desired exposure level.
Flexible and accessible
Operating on a subscription basis, private debt evergreen funds offer flexibility through regular capital intake (e.g., daily, weekly or monthly), providing investors with multiple opportunities to enter or adjust their investments. Lower investment minimums mean a broader range of investors can participate in the asset class.
Highly diversified portfolio
Except for investors subscribing to newly launched private debt evergreen funds, capital from new subscriptions typically benefits from exposure to a highly diversified private debt portfolio, delivering immediate diversification benefits. Private BDCs, for example, have an average of 248 borrowers per fund.³ This is particularly important in private debt: Minimizing downside risk is crucial because of limited upside potential.⁴
Operational simplicity and frequent valuations
Private debt evergreen funds, such as BDCs or American interval funds, are typically required to report frequently using a standardized template, which increases transparency for investors. Combined with the absence of capital calls, this allows resource-constrained investors to manage their private debt portfolio more efficiently. Furthermore, regular reporting requires frequent loan valuations—typically daily, weekly or monthly—providing investors with better insights into their portfolio holdings.
Liquidity option
Private debt evergreen funds allow investors to redeem their capital frequently and regularly. Monthly or quarterly redemptions are common.
In general, redemptions are processed at NAV without transaction costs and capped at a certain portion of the overall fund (5% is common). For private debt managers, balancing the need for liquidity with the inherently illiquid nature of private debt presents challenges, but they have several tools at their disposal.
Repayments
In private debt evergreen funds, liquidity is primarily derived from contractual cash flows, such as loan repayments, rather than asset sales. Interest income is typically not considered a source of liquidity because it is used to service distributions.⁵ On average, private debt portfolios see annual repayments around 30%, though market conditions can be a factor.⁶ This natural liquidity is advantageous, as it incurs no additional costs for investors and aligns with the fund’s core investment strategy.
Valuations
Because private debt valuations tend to be less reliant on macroeconomic factors, they tend to be stable across the business cycle. This is in part thanks to the floating rate nature of private debt loans, which significantly reduces duration risk—especially relative to bonds. As a result, a “bank run” on the fund is less likely as investors find comfort in the relatively stable valuations. Furthermore, loan repayments tend to come in at or close to par, even during economic downturns.
Short-term assets
Some private debt managers allocate a portion of their portfolios to more liquid assets, such as syndicated loans. While this approach enhances flexibility and provides a buffer for unexpected liquidity needs, overreliance on liquid assets may reduce returns, introduce volatility, and force investors to realize losses.⁷ It can also lead a fund to deviate from its primary strategy.
Instead, focusing an evergreen fund’s liquidity buffer on private debt short-term assets, such as bridge loans or warehouses, combined with money market funds may be preferable.
Leverage
Most private debt evergreen funds use leverage to enhance returns and meet short-term liquidity needs via borrowing facilities. Managers can draw on credit lines to fulfill immediate liquidity demands and repay them as cash builds to minimize cash drag. In addition, private debt assets typically allow for higher leverage levels than other private asset classes. This gives the fund’s manager a significant liquidity buffer.
Secondary transactions
For evergreen funds, secondary markets offer immediate capital deployment and an additional liquidity avenue. Private debt’s relatively stable valuations (especially compared with public securities) can help managers secure attractive pricing on the secondary market. However, the viability of secondary opportunities is highly sensitive to market conditions.
Finally, matching subscription inflows with redemption outflows is yet another liquidity management tool in a fund manager’s arsenal. However, it is unlikely to be available when markets are stressed and therefore should not be relied on heavily.
Attractive for both institutional and individual investors
Institutional and individual investors can find compelling reasons to incorporate private debt evergreen funds into their portfolio construction.
Institutional investors can support their private debt allocation via drawdown funds by placing uncalled capital in an evergreen fund. By doing so, investors can reach their deployment targets earlier with enhanced diversification while enjoying increased liquidity. Evergreen funds are often more broadly diversified and provide early access to a more mature portfolio—both of which can be particularly beneficial in the initial stages of portfolio construction.
For individual investors and small institutions with limited operational capabilities, it may be beneficial to construct their private debt portfolio around an evergreen fund, since this could provide an immediate and diversified core exposure to the asset class.
Conclusion
Evergreen funds aim to deliver the return and diversification benefits of private debt while offering several advantages, including immediate capital deployment and maximizing MOCC. Private debt is particularly well suited to fulfill some of the requirements of evergreen funds (e.g., liquidity options) thanks to its reliance on contractual cash flows and significant diversification. Because of the ongoing growth of private debt evergreen funds, individual investors now have access to an additional tool that until recently was reserved for large institutional investors only. As a result, they can better manage their exposure and enjoy the benefits that the asset class can provide in a portfolio.
