When looking at the numbers for private and public markets, the measures that appear comparable on the face of it are hardly so in reality. As a consequence, for a portfolio of private assets, it takes several years before the investor has a more or less accurate idea of the portfolio’s performance. In 2019, on the cusp of the current decade, we suggested that public markets would outperform private markets during the 2020s. 

The strong growth in assets under management in illiquid funds during the last phase of financial repression through to 2021 suggests that returns might turn out to be lower than expected for private assets. More recently, private equity portfolios have had mixed fortunes, as usual, but the interest rate normalisation shock of 2022/2023 has had an impact that is beginning to be felt on the performance of diversified private equity portfolios. At a time when developed market public equities are at all-time highs, the short-term comparison is particularly striking.

Evergreen funds could be a game changer

Sophisticated large investors have, to some extent, learned to handle the challenges of investing in private market closed-end funds. Those with fewer resources and smaller amounts to invest often find it difficult, especially when on their own. 

As an increasing number of smaller investors with limited experience and resources seek to invest in private markets, managers have come up with an alternative: the open-end (or ‘evergreen’) private market fund, which is designed to address some of the challenges when it comes to investing in private markets. These funds offer a more flexible investment approach compared to traditional drawdown structures. They allow investors to subscribe and redeem at regular intervals, typically quarterly, making private markets more accessible to a broader range of investors. In that sense, evergreen funds are suited for investors who are looking for operational simplicity but are prepared to accept lower performance due to enhanced liquidity conditions. 

Open-end evergreen and traditional closed-end funds are complementary and serve different purposes. Investors who want the ability to redeem and/or have limited amounts to deploy can use evergreen funds as a one-stop shop. Investors who lack the scale but want to build a solid long-term programme can choose diversified closed-end funds of funds and use evergreen funds as satellites to fine-tune their exposure. Sophisticated, large investors can deploy larger amounts in evergreen funds without multiplying fund investments.

With the ‘democratisation’ of private markets, the number and assets under management of evergreen funds are expected to grow. If history is any guide, these funds will be put to the test in stressed markets when investors seek significant redemptions. How managers handle these requests and how funds perform in these circumstances will determine their long-term success. Evergreen funds could be a gamechanger for the industry. For the first time, we will be able to objectively compare the returns on these strategies with those of liquid asset classes, thus enriching our toolbox.

What should investors look out for?

The dispersion of returns in private markets is much higher than in public markets. We know from experience that in order to achieve an attractive return net of costs and to account for the illiquidity premium that an investor is legitimately entitled to expect from an exposure to unlisted markets, it is imperative to allocate to asset managers who are in the first or upper second quartile of performance. 

As in the public markets, the sum of the parts of a portfolio is greater than its individual parts. Fund selection and diversification across different vintage years (i.e. the calendar year in which a fund was launched or raised capital from investors) are therefore crucial. Private assets offer a welcome diversification from traditional asset classes.