Abstract

Evergreen funds are a rapidly growing segment of the private capital universe. While open-ended structures have existed for decades in some asset classes such as real estate, the more recent products have included a broader set of assets such as private equity and credit. In addition, many new funds are designed to appeal to individual investors (e.g., low minimum investments). Currently, little is known about the portfolio properties of evergreen funds versus traditional closed-end, drawdown funds. In this analysis, we consider the differences between evergreen and closed-end funds in a simulation exercise with a focus on expected returns, risk, and portfolio cash flows. While the average risk-adjusted performance is similar across fund types, we show that investing in a series of closed-end funds is likely to lead to substantially more variation and unpredictability in cash flows and portfolio risk levels than an investment in evergreen funds. This suggests that investors without a large diversified portfolio of closed-end funds could face unwelcome challenges undertaking portfolio allocation and rebalancing as well as slightly lower expected returns. We also propose some additional questions that investors should examine when trying to decide what structure is most appropriate for their investment needs.

Authors

Prof. Gregory W. Brown, UNC Institute for Private Capital and Kenan-Flagler Business School
William Volckmann, UNC Institute for Private Capital and Kenan-Flagler Business School