All about Evergreen Private Equity Funds 🌲
👉 Definition:
The term “evergreen” is commonly associated with the science and botany field since it refers to the resilient character of certain trees that retain their leaves in winter.
However, in the Private Equity world, it refers to investment vehicles that have no predefined closing date. Evergreen investment funds will therefore generally tend to keep their holdings in companies beyond the traditional five to seven year term. The exit date of the investment does not depend on the date of entry into the capital. It is only intended to be set according to the interests of the target company and the Limited Partners, who are the investors that provide funds to the investment vehicle.
👉 Advantages for the fund and the Limited Partners:
Evergreen funds have greater flexibility in terms of investment liquidity, enabling them to sell shares at a time when the company is performing well or the market conditions are favorable. This approach allows evergreen funds to avoid making emergency disposals to provide liquidity to Limited Partners, which could negatively impact the investment’s Internal Rate of Return (IRR). In this case, the momentum of the investment is given priority over the need for liquidity.
👉 Advantages for the target company:
The advantage for the target company is even more apparent since it brings in a long-term investor who promises to support it until the end of the project and not just until the end of the 5th year of the business plan.
👉 Why aren’t all funds evergreen?
After reading the previous paragraphs, one may wonder why not all funds adopt the evergreen structure if it has so many advantages. Finally evergreen funds have less pressure on liquidity. They are more likely to exit at a high valuation point and the companies are accompanied over the long term by an investor who shares the same interests without this time constraint. Why not definitively eliminate this liquidity requirement and see evergreen funds flourish?
Mainly because the conditions for long-term investments are strict:
- Private equity is already an illiquid form of investment and the idea of investing over the long term and without any indication of temporality can put off a large number of investors, starting with private investors.
- Some institutional investors are nevertheless willing to take the gamble of investing over the long term. However, they will often expect a regular cash flow in case of high illiquidity. These cash flows take the form of dividends.
- In order to count on this dividend return and take the risk of long-term investment, evergreen funds will generally target companies with a certain level of maturity and stable and predictable cash flows. So far, tech start-ups chasing growth are not the main targets.
⚠️ Point of attention
Beware of confusion, despite an etymology that draws its sources from the jargon of botany, evergreen funds are not necessarily Impact funds or Social and Responsible Investment funds.
Finally, if you want to see what an Evergreen PE Fund looks like, you can visit the Généo Capital website.