Europe's evergreen funds: Examining the size of the market transforming private investments for private wealth clients

What can evergreen funds offer for investment managers, HNWIs, UHNWIs, and family offices? Justina Deveikyte, Co-Founder, Novantigo, shares recent trends in private markets and how private banks and wealth managers view the opportunities it provides.

Despite concerns from some private banks and wealth managers, and their clients about private markets—particularly regarding the liquidity of these investments—interest in private markets continues to rise. Research from Novantigo shows that the European evergreen fund market, including only UCI Part II and open-end RAIF funds, has grown significantly in the last 12 months. As of Q1 2024, the market stood at approximately €37 billion, with more funds being launched recently.

Our conversations with private banks and wealth managers indicate a growing interest in evergreen UCI Part II funds. Some large private banks we spoke to believe that UCI Part II funds can offer similar benefits to closed-end funds, questioning why investors should opt for the latter. Open-end evergreen funds require smaller commitments, allow quarterly or even monthly redemptions, and offer greater diversification.

In addition, research conducted by Università Cattolica del Sacro Cuore (professor Theo Delia-Russell) found that semi-liquid funds generally outperform their closed-end counterparts in terms of medium-term Multiple on Invested Capital (MOIC), albeit with a lower Internal Rate of Return (IRR). In fact, two large global private banks that Novantigo spoke to mentioned the same findings. They noted that comparing the performance of closed-end and open-end evergreen funds on a multiples basis shows comparable results, largely due to the compounding effect associated with evergreen products, as gains are not distributed but reinvested into the fund. From an IRR perspective, however, evergreen funds lag significantly behind closed-end funds.

One of Switzerland's private banks, which recently filled their product shelf with UCI Part II evergreen funds, mentioned that it is difficult to estimate how much they will be able to raise for each fund they onboarded, but that such products are the perfect entry point to private assets for high-net-worth individuals (HNWIs). For ultra-high-net-worth individuals (UHNWIs) and even family offices, there is also a case to invest in such products. While these funds may not constitute a significant proportion of their overall allocation, sophisticated investors could use them for cash management purposes. Another use case amongst the most sophisticated investors is to initially allocate to evergreen funds and to secondaries to quickly gain exposure to such investments and to then transition into closed end structures over time.

The case for evergreen funds in client portfolios?

While some private banks and wealth managers have a long history of offering evergreen funds, others are still in the early stages of determining their approach. Based on Novantigo’s survey of private banks and wealth managers, almost two third do not offer UCI Part II funds to their clients. Among those who do, 23% have only 1 to 2 evergreen UCI Part II funds on their product shelves, while 13% offer between 3 to 4 funds. Only 2% of respondents offer more than 5 UCI Part II funds.

The approach to integrating evergreen funds into client portfolios varies widely. Institutions with longstanding experience in evergreen funds tend to offer more funds to a broader wealth spectrum.

They are also more often including them into discretionary portfolios to build up core exposure. They typically offer a range of products covering all asset classes, often focusing on single-asset rather than multi-asset products.

Many of the banks participating in Novantigo’s research, believe that evergreen funds are most suitable for building core exposure to private assets or they see them as complementary to closed-end funds, useful for managing cash between capital calls and to quickly build up a private investor’s exposure to private assets.

60% of private banks and wealth managers surveyed by Novantigo intend to expand the range of UCI Part II funds offered to their clients. Many private banks seek to add new funds, and once their product shelves reach capacity, it will be increasingly challenging to land on their buy lists as they are cautious not to cannibalize their existing offerings.

Private banks’ preferences when selecting evergreen funds

Novantigo’s research shows an overall preference for big brand names with larger evergreen funds. However, other factors, such as investment philosophy, team expertise and the choice of liquidity mechanisms also play a crucial role in fund selection.

The approach that asset managers choose to seed an evergreen fund is important to private banks and wealth managers. The message of discipline strongly resonates and transparency is key.

A large Italian private bank expressed a strong preference for products with defined limits and constraints on raising and deploying assets. Their concern is the increasing popularity of evergreen funds, which could potentially dilute asset quality. Therefore, asset managers should exercise caution to prevent evergreen funds from growing too rapidly.

The choice of liquidity mechanism and an understanding of fund behaviour in extreme situations, like e.g., continued net outflows, is crucial in the manager selection process, too.