When we moved into our nearly 100-year-old Tudor home, the kids were most excited about the classic clawfoot bathtub upstairs. On our first night, after a long day of unpacking, we filled it up for their inaugural soak. The bath was beautiful — deep, elegant, timeless. But when it was time to drain it… we waited. And waited. The water trickled out painfully slow. Turns out, the plumbing was never designed to release that much water quickly. By the time it emptied, the kids were already asleep.
Just like our bathtub, evergreen alternative funds are built for slow, steady use — not sudden surges or mass withdrawals. Try to drain them too quickly, and the system backs up.
Today, about 5% of total private market assets (~USD 700 billion) are held in evergreen structures. Hamilton Lane anticipates that this could rise to at least 20% over the next decade. Growth is being driven by private wealth investors, many of whom are new to private markets and can now invest with minimums as low as $5,000 — compared to the $5 million often required for traditional closed-end funds. Institutional allocators are also showing interest, attracted by the flexibility and periodic liquidity.
But as with my elegant bathtub, the “Liquidity Mismatch” is an inherent drawback of evergreen structures. Most funds offer quarterly redemptions of 2–5% of NAV, while the underlying investments — whether private equity, real estate, or credit — are fundamentally illiquid. Assets can’t be sold quickly without incurring losses. Redemption “gates” are often there to protect remaining investors from forced sales.
A notable example is Blackstone’s $70 billion real estate fund, BREIT, which began gating redemptions in late 2022 after withdrawal requests exceeded its limits. The gate remained in place for over a year.
Other drawbacks of evergreen structures include:
- Cash Drag: To meet quarterly redemptions, funds may keep 10–20% in liquid assets — which typically earn lower returns.
- Incentive Misalignment: Evergreen managers earn fees on NAV rather than realized performance, reducing long-term alignment with investors.
- Flow Sensitivity: Sudden inflows may dilute returns if capital must be deployed too quickly; large outflows can trigger asset sales at unfavorable terms.
- Valuation Lag: NAVs are based on modeled or lagged valuations, which can obscure real-time market risk.
Despite these concerns, the growing popularity of evergreen structures reflects the many advantages investors perceive:
- Periodic Liquidity: Investors often gain access to capital within months — rather than waiting a decade, as is typical in closed-end funds.
- Immediate Diversification: Investors gain day-one exposure to a mature, diversified portfolio that continues to evolve over time.
- Operational Simplicity: Evergreen funds involve fewer legal hurdles, and in many jurisdictions, simplified tax reporting (e.g., 1099s instead of K-1s in the U.S.).
- Compounding: These funds reinvest proceeds rather than returning capital, allowing gains to compound continuously.
Just as my kids learned that a slow-draining tub meant more time in warm water, investors may find that illiquidity can be a hidden strength.
During the Global Financial Crisis and again in the COVID sell-off, many were relieved that their illiquid holdings couldn’t be sold in panic. When there’s no “easy exit,” long-term thinking prevails — and that’s often exactly what private markets demand.
As evergreen funds become more mainstream, it’s critical that investors understand what they’re stepping into. The flexibility is real — but so is the friction. The structure needs to fit the substance. Otherwise, the next time investors rush for the drain, they might discover — too late — that the plumbing was never meant for that.
