Private Credit Goes Big on Open-Ended Funds to Lure Retail Cash

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The practice of gating — or limiting withdrawals — can be useful to manage flows and reduce the risk of premature, forced asset sales, Heron’s Nguyen said. However, the more illiquid assets an evergreen holds, “the less likely investors are to exit fully, or at all, during market stress, especially within the desired time frame” as such moves would probably reduce returns, he added.

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For private credit managers, fundraising cycles drain time and resources, while open-ended structures can in theory provide a steady flow of new funds. Meanwhile, investors won’t need to decide whether to reinvest in a manager’s new fund, but can simply leave their capital in one place. Furthermore, joining an existing fund can bring returns more quickly.

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“The traditional fund structures typically haven’t served our single or multi-family office clients well and so we’ve spent more time looking at different ways to allocate, developing our own evergreen strategy,” Jason Proctor, managing director for Troviq Private Markets Group Ltd.

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These include investments through the secondary market for trading stakes in funds as well as separately managed accounts, vehicles that are tailored, often to single investors, he said.

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Structuring Fees

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The jury’s still out as to how market fees will be structured. Private credit giants KKR & Co Inc. as well as Carlyle Group Inc. have been in the market with funds that don’t have performance fees, known as carry, which is meant to incentivize investors.

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There’s some confusion about how to set performance fees for fund managers without the end date of a traditional fund, risking a removal or reduction of performance bonuses that may lead to attrition for a fund’s best employees, investors worry.

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Research from Bloomberg Intelligence suggests alternative asset managers’ deepened focus on retail channels — which includes evergreen vehicles — could add $10 billion to $20 billion of management fees.

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Nayef Perry, managing director and head of direct credit at Hamilton Lane Advisors Inc., said his firm has been in the evergreen space for more than half a decade, enabling it to build the needed “plumbing” before the latest rush seen across the industry. 

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“It’s still very early to say whether mistakes will be made in the market, but having the scale and infrastructure are important to successfully launching these structures,” Perry said. Nevertheless, there’s “a lot of room for growth” with evergreen funds still accounting for as little as 5% of the total net asset value of the industry, he added.

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Deals

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