Page 19 - Investment Advisor June 2021

ALTERNATIVE INVESTMENTS

By Drew Schardt

Evergreen Funds Offer Institutional Access

to Individual Investors

Looking beyond a stock and bond mix, advisors have a new way for their

high net worth clients to access these private markets.

he 60/40 stock and bond mix vate markets with a short time horizon in
has long been the industry stan- mind. Private asset investing owes some of
Tdard for individual investor its success to realizing value creation over
portfolios. But it may not be the risk/ several years, not months. But a vehicle
return profile that cemented its legacy. that allows greater liquidity should never-
And it could change as access to new theless remove a hurdle for an individual
investment areas improves. who isn’t investing in perpetuity the way
Large minimums, complex tax report- an endowment or foundation might.
ing, liquidity constraints and longer time Immediate exposure: Another dif-
horizons combined to prevent many high ference between evergreen funds and
net worth and mass affluent investors from traditional private partnerships is that
gaining access to the private markets and investors can subscribe into the ever-
other alternative asset classes. This left green fund on a monthly or periodic basis.
individuals and their advisors little choice Given some of these potential benefits, Many of these funds offer new investors
than to optimize a portfolio with the equity individuals may want to take a page from a built-out and diverse pool of existing
and bond strategies available to them. the institutional investors’ playbook. assets on day one. Investors not able to
However, new fund structures are In recent years, private market man- diversify into private assets, the quick
democratizing private markets. As they do, agers have sought to address some of deployment into assets may be favorable
high net worth portfolios could look a lot the structural barriers that prevented to the traditional model, in which funds
more like those of institutional investors. affluent clients from accessing the asset are raised for one or two years, and capi-
class. A new fund structure — often tal is deployed over several more.
THE INSTITUTIONAL PORTFOLIO called an evergreen fund — takes aim at Tax complexity: Historically, individ-
EVOLUTION several of the impediments. Each fund ual investors had to file a K-1 for their
Private market investments have long has its own nuances, but some of the investment in an illiquid private partner-
been a staple of institutional portfolios. issues that evergreen structures seek to ship. The cumbersome document didn’t
Pensions and endowments, generally, address include: necessarily prevent private market
have private markets allocations of 10%– Investment minimums: Historically, investing, but it likely didn’t encourage it
20%, according to the McKinsey Global the minimums for a private equity part- either. The lower minimums and liquidi-
Private Markets Review 2021 nerships were around $5 to $10 million, ty of an evergreen fund allow individuals
It’s hard to argue their decision. Our probably one of the biggest impedi- to report the investment with a simpler
research found that private equity and pri- ments to this investment. Evergreen 1099, which investors, accountants and
vate credit have outperformed global pub- funds offer a lower entry point, typi- advisors may find preferable.
lic equity and credit markets respectively cally ranging from $50,000 to $100,000, As advisors and their clients become
19 of the last 20 years. They’ve also offered depending on the fund. familiar with these new structures, don’t
institutional investors diversification ben- Improved Liquidity: Long lockup be surprised to see more participating in
efits and access to a much larger investable periods also have been prohibitive to indi- the asset class. The traditional 60/40 mix
universe than public markets, where the vidual investors. Traditional private equity of high-net-worth portfolios may start to
number of publicly listed companies has partnerships include a 10-12 year com- look quite different going forward.
Adobe Stock years, according to research by Professor monthly or quarterly redemptions. To be Drew Schardt is managing director of
mitment. Evergreen funds, however, offer
fallen by more than 30% over the last 20
clear, individuals shouldn’t approach pri-
Jay R. Ritter of the University of Florida.
Hamilton Lane.

JUNE 2021 INVESTMENT ADVISOR 17