What are the risks of evergreen funds?
Evergreen funds—also known as semi-liquid funds, interval funds, or tender offer funds—have grown rapidly in recent years. They promise investors access to private markets in a format that feels more flexible and user-friendly than traditional closed-end funds. But alongside their appeal, many investors are asking: What are the risks of evergreen funds?
In this article, we examine the key risks of evergreen funds, from liquidity challenges to performance dispersion, fees, and benchmarking limitations. Understanding these risks is essential for anyone considering an allocation to evergreen structures.
1. Liquidity Risk: Redemptions Are Not Guaranteed
One of the most significant risks of evergreen funds is liquidity mismatch. Unlike mutual funds or ETFs, which offer daily liquidity, evergreen funds typically allow redemptions only on a quarterly or semi-annual basis. Even then, funds can limit withdrawals, often capping redemptions at 5–20% of net assets.
This means investors may not always get their money back when they want it. In times of market stress, redemption queues can build, leaving investors “trapped” in the fund. The Wildermuth Fund liquidation in 2023 is a cautionary example of how sustained outflows and illiquid assets can force a fund to suspend redemptions and wind down.
2. Performance Dispersion: Not All Evergreen Funds Are Equal
Another major risk of evergreen funds is high performance variability. While some private equity evergreen funds have reported double-digit returns, others—especially in real estate—have significantly underperformed.
Factors driving this dispersion include:
- Portfolio construction (direct investments vs. secondaries vs. co-investments)
- Asset class exposure (private credit vs. private equity vs. real estate)
- Manager expertise and track record
In short, two evergreen funds with similar labels can deliver radically different results.
3. Short Performance History
Evergreen funds are still relatively new, especially outside real estate and private debt. Many funds have less than five years of track record, making it difficult to evaluate performance across full market cycles.
This lack of long-term data is a risk for investors, as evergreen funds remain untested in severe downturns. Allocators may not know how these funds behave when liquidity is scarce and valuations are under pressure.
4. Fee Structures and Hidden Costs
Evergreen funds often charge higher fees than traditional public market vehicles. In addition to management fees, they may include:
- Performance fees (carry) on underlying fund commitments
- Transaction costs for secondary purchases
- Additional fund-of-funds expenses
These layered fees can erode net returns. Worse, they are not always transparent to individual investors accessing evergreen funds via wealth platforms.
5. Valuation and Return Smoothing
Because evergreen funds report NAV-based returns, valuations are not updated daily. Instead, they rely on periodic appraisals from underlying managers. This creates two risks:
- Return smoothing: reported NAVs may understate volatility compared to public markets.
- Front-loaded gains: funds buying secondaries at discounts may record immediate paper gains, flattering short-term returns that are unlikely to persist.
Investors should be cautious when interpreting early performance data.
6. Benchmarking Challenges
A less obvious but critical risk of evergreen funds is the lack of standardized benchmarks. Managers often compare performance against broad public indices like the Russell 2000 or leveraged loan indexes, which are not directly comparable to semi-liquid private portfolios.
This makes it difficult for investors to assess whether evergreen funds are truly generating risk-adjusted outperformance or simply charging high fees for market-beta exposure.
7. Structural and Operational Risks
Finally, evergreen funds carry structural risks linked to their design:
- Concentration risk if a fund invests heavily in a small number of underlying assets.
- Operational complexity, including fund-of-funds structures that depend on the performance of external managers.
- Regulatory uncertainty, as evergreen funds continue to evolve in structure and oversight.
Key Takeaways: Should You Invest in Evergreen Funds?
So, what are the risks of evergreen funds? They include:
- Liquidity constraints and redemption limits
- Wide dispersion in returns
- Limited track records
- Higher and sometimes opaque fees
- Valuation lag and return smoothing
- Benchmarking challenges
- Structural and operational vulnerabilities
Evergreen funds are an exciting innovation that broaden access to private markets. However, investors should approach them with caution, perform thorough due diligence, and compare multiple managers before allocating.
Evergreen Funds FAQs
Are evergreen funds safe?
Evergreen funds are not risk-free. They provide easier access to private markets but come with risks such as limited liquidity, valuation delays, and performance variability. Safety depends on the fund’s structure, underlying assets, and management.
Do evergreen funds guarantee liquidity?
No. Evergreen funds offer periodic liquidity, often quarterly, and may limit or suspend withdrawals during market stress. Investors should be prepared for capital to be tied up longer than expected.
Evergreen funds vs. closed-end funds: what’s the difference?
Closed-end funds (drawdown structures) lock up capital for a fixed term (often 10+ years) with no redemption options until maturity. Evergreen funds, by contrast, are open-ended, allow continuous subscriptions, and offer limited redemption windows.
What types of investors should consider evergreen funds?
Evergreen funds may appeal to high-net-worth investors, family offices, and wealth managers seeking private market exposure with some liquidity. However, they may not be suitable for investors who need frequent access to cash.
Do evergreen funds deliver higher returns than public markets?
Not always. While evergreen funds can offer access to private credit, private equity, and real estate, their performance varies widely. High fees, valuation smoothing, and liquidity constraints mean that returns are not guaranteed to outperform public benchmarks.
