Five years ago, two private equity evergreen products were being marketed in Australia, aimed at wealthy individuals who were previously dissuaded by the illiquidity, large ticket sizes, and capital call structures intrinsic to the asset class. Today, over a dozen are available from the likes of Blackstone [NYSE:BX], Carlyle [NASDAQ:CG], and KKR [NYSE:KKR] to HarbourVest Partners, Pantheon, and Partners Group [SWX: PGHN].

A couple of local managers, Pacific Equity Partners (PEP) and Five V Capital, have also joined the party, albeit with very different products. Cameron Blanks, a manging director who leads PEP’s Gateway programme, expects assets under management (AUM) to double to AUD 1bn (USD 690m) over the next 12 months. Ultimately, he believes AUD 5bn-AUD 10bn is achievable in the long term.

For context, Partners Group operates the largest private equity evergreen fund globally, now worth USD 15.5bn. It entered the evergreen space in 2001 and these products now account for 30% of the firm’s USD 147bn in AUM. Yet Morgan Stanley and Oliver Wyman still see considerable white space, estimating retail wealth investors will allocate USD 5.1trn to private markets by 2025, up from USD 2.3trn in 2020.

Australia was the first territory in Asia to see meaningful private wealth penetration of private equity, and local wealth management platforms confirm the surge in global players offering evergreen and traditional closed-end products. Momentum is very much with the former.

“Advisors and clients like this style of product because it’s easy for them – they can put money to work tomorrow,” said Stephen Dickinson, an alternatives investment analyst at Escala Partners, which has two-thirds of its alternatives AUM in evergreens and is seeing a growing number of credit and infrastructure-based products coming to market in addition to private equity.

“In the last three to five years, more managers have been marketing evergreen products simply because that’s where the flows are going.”

For most firms active in this space in Asia, Australia is one of four core markets. Hong Kong and Singapore, the region’s main private banking hubs, are established ports of call. Japan is the up-and-comer – as recently as three years ago, managers were still figuring out how to address the market – while pockets of opportunity exist everywhere from Taiwan to Thailand.

Broadly speaking, Asia trails North America and Europe in terms of client familiarity with evergreens, and the region presents its own challenges in areas like distribution. But industry participants describe the overall product type as barely beyond its first iteration. Approaches will continue to evolve, on the demand side and the supply side, and the melting pot will separate into winners and losers.

“It’s hard to find a GP that hasn’t done anything or doesn’t plan to do anything in evergreens. As the market grows, the dispersion of returns will increase. There is a risk that some solutions get diluted because they take in too much cash or they grow too quickly, or they become too concentrated because deployment is very chunky,” said Christian Wicklein, global co-head of private wealth at Partners Group.

“We’ve seen a wave of new solutions, but at some point, the wave will break and there will be consolidation. Over the next five years, we will see which of these strategies are viable in the long run.”

Single vs multi

From a client perspective, the addressable universe for evergreens is often defined as those unable to build their own sufficiently diversified PE programmes – with USD 500m cited as the minimum size. This includes a 22.5m-strong global high net worth individual (HNWI) population with investable assets of USD 1bn to USD 30bn, according to Capgemini. Nearly one-third reside in the Asia Pacific region.

The provider universe, meanwhile, is routinely reduced to multi-manager versus single manager. On one hand, traditional fund-of-funds providers mine their extensive GP relationships to populate products with streams of secondaries and co-investments, looking to combine savvy asset selection with diversification. On the other, global private equity firms offer direct access to their best deals.

For example, Pantheon’s global private equity fund launched in March and had USD 64.7m in assets as of July. That was spread across 22 investments comprising more than 210 portfolio companies – all buyouts. KKR’s K-Prime product, which arrived nearly 12 months earlier, has USD 2.6bn in net asset value (NAV) tied up in 79 direct deals drawn from the firm’s various private equity strategies.

One view is that the dispersion of outcomes will be lower for the multi-manager contingent, simply because greater concentration of exposure brings additional risk.

“The top-performing single-manager evergreen will do better than the top-performing multi-manager evergreen, but there will be a lot of single-manager evergreens that do worse as well,” said Gregory Van, CEO of Endowus, a Hong Kong and Singapore-focused wealth platform that offers a range of fund products, including evergreens for private markets access.

However, there is an element of product differentiation across the market, both nuanced and fundamental. Regarding the former, Dickinson of Escala highlights frequent biases in terms of geographic exposure – Partners Group and EQT [STO:EQT] towards Europe, Hamilton Lane [NASDAQ:HLNE] and Blackstone towards North America – and clients may pick one over the other based on their overall portfolio objectives.

On a fundamental level, K-Prime is not indicative of all single-manager offerings. When Carlyle entered the private equity evergreen space this year, it leveraged the AlpInvest Partners network to build an allocation model that is neither wholly Carlyle nor wholly direct. Blackstone threads in its own secondaries funds as well as opportunistic strategies like GP stakes and special situations.

EQT followed its own path on launching Nexus last year. While most GPs eschew primary funds because the j-curve is unhelpful in liquidity management, EQT put it front and centre. Of the EUR 693m (USD 766.8m) in NAV as of August, 71% was in funds and 21% in co-investments.

“We wanted to give individual clients to what an institutional investor would have exposure to if they had invested with us,” said Sueann Yeo, a director and head of Asia Pacific private wealth at the firm. “It looks like a fund-of-fund structure, but we create a single layer of fees and give them the track record of the funds that have performed for a long time.”

Liquidity matters

Whatever the content of an evergreen product, it is inextricably linked to the need to generate liquidity – typically on a quarterly basis, capped at 5% of NAV – from an illiquid pool of assets. Six years ago, Hamilton Lane didn’t have a portfolio management team within its private wealth division. Now, 32 people spend their time forecasting cash flows, assessing risk, and recommending portfolio adjustments.

This has arguably become a bigger focal point in the past 18 months following some high-profile gating incidents, where the 5% limit was reached on certain real estate and credit products, resulting in blocks on further redemptions. Some managers responded by increasing lockup periods for new clients from 12 months to 18 or 24 months.

“Evergreen vehicles must ensure there isn’t undue cash drag on returns but getting the balance right is a real skill,” said Simon Jennings, head of the private client group for Europe, the Middle East, and Africa and Asia Pacific at HarbourVest. “On the one hand, we need to make sure we can honour potential redemptions. On the other, if you sit on 20% cash each year, that will harm the return.”

Managing inflows is part of the trick. Some managers warehouse deals and roll them into the evergreen product on launch to ensure immediate performance. Similarly, Brian Lim, a partner and head of the Asia and emerging markets teams at Pantheon, advocates phasing in capital. If deals aren’t lined up, or subscriptions exceed transaction volume, it is possible to defer inflows until the next subscription point.

Secondaries also play a role. The PEP evergreen product is an extreme example, concentrating solely on single-asset continuation vehicles mostly launched by managers in North America and Europe. For others, it is about building a blend of GP-led and LP-led exposure that ensures cash flows back into the fund earlier than it would from primary investments or co-investments.

Liquidity sleeves amounting to around 10% of NAV are a standard evergreen feature, though composition differs. Ultra-conservative players opt for a high cash component; alternatively, listed equities, private credit or even fixed income products like Treasuries may feature more prominently. In addition, credit lines are often used to bridge cash flows where there is sufficient visibility.

HarbourVest uses all these tools. However, on signing up Swedish pension fund AP7 as the anchor investor in an evergreen private equity strategy last year, it secured two additional sources of liquidity.

First, a seed portfolio – mature enough to be generating distributions – that HarbourVest created for AP7 was transferred into the evergreen product. Second, AP7 agreed to make new annual commitments amounting to USD 600m over five years, and crucially, without the expectation of near-term liquidity. In addition to widening HarbourVest’s options, it points to another trend in evergreen demand.

“We’ve found that many institutional investors don’t need liquidity but they like the turnkey solution the evergreen provides because they don’t have to manage capital calls and distributions, and they don’t have to make re-up decisions when they get distributions back,” said HarbourVest’s Jennings.

“And if they don’t need quarterly liquidity, that provides an enormous protection for private investors that might want to make use of that 5% per quarter redemption feature.”

Other industry participants also highlighted the broader appeal of evergreens. For all the talk of private equity pushing into retail channels, Hamilton Lane’s main clients for these products are ultra high net worth individuals, family offices, endowments, and foundations. There is an expectation that fuller democratisation will happen eventually, but it is unclear exactly which route will be most prolific.

“We’ve seen collaborations between private markets firms and traditional asset owners. Maybe investments get bundled up and listed. And then there’s tokenisation and digital assets. If I had to bet on one that is ultimately going to give people access, tokenisation is really interesting,” said James Martin, a managing director and head of global client solutions at Hamilton Lane.

Distribution dynamics

With tokenisation years from entering the mainstream, managers must rely on traditional distribution channels. Different geographies in Asia have their own dynamics in terms of onshore entities, tax and regulatory requirements, and currency hedging. Beyond that, market entry is conditional on hiring local staff to pioneer education initiatives and identifying local distribution partners.

Most managers have embarked on hiring sprees in the core markets and are upping their game in terms of outreach, for example holding seminars for intermediaries – and to some extent end clients – to which they provide industry insights. Broad stakeholder engagement is seen as essential to the rise of Japan, where as recently as 12 months ago there was little more than basic curiosity about evergreens.

“There has been a change in the view of the Japanese regulator with regards to private market perpetual funds being offered to wealth clients. There is a willingness to allow our banking partners to distribute these vehicles,” said Shane Clifford, a managing director and head of global wealth at Carlyle. “It’s a very nascent effort, but the market is exponentially stronger today than it was a year ago.”

Asked why a breakthrough came in Australia so much earlier – Partners Group first launched a local feeder for a global evergreen product over a decade ago – several industry participants pointed to structural familiarity. Tapping the private wealth segment means engaging with an assortment of intermediaries not unlike the registered investment advisors (RIAs) typically targeted in the US.

Elsewhere in Asia, banks, asset managers, and other financial institutions are the primary intermediaries. There are always costs to distribution, but there is some unease with compensation structures that emphasize one-off commissions.

“Distribution works well in markets that are not so commission-driven – Australia, Europe, the US through RIAs,” said Van of Endowus. “We are one of few distributors in Asia that works on a commission-free, conflict-free basis. When a market is commission-driven, it often means the distributor is incentivized to sell a close-end fund over an evergreen fund because distribution commissions may be better.”

The impact is played down in certain quarters, with one private wealth professional at a global GP observing that bank partners generally want closed-end and evergreen funds. He added that decisions are based on filling gaps in product line-ups rather than commissions. However, an industry peer noted most of his firm has achieved deeper penetration of evergreens in markets that are not commission-driven.

A distributor that puts clients into a closed-end PE fund via a feeder receives an upfront fee from the GP in addition to sales and administration fees charged to clients. Evergreens generate fees on an ongoing basis, which might appeal from a revenue perspective if the asset base grows, but Partners Group’s Wicklein noted there have been instances of distributors seeking one-off incentives for evergreens.

Regulators are looking to crack down on commission-driven structures, while mis-selling or over-selling has been relatively limited to date because global private banks are generally careful, according to Jennings of HarbourVest. Nevertheless, he warns that “the broader the range of distribution platforms, the fewer controls are in place,” and underlines the importance of partner selection.

HarbourVest prefers to work with responsible and proven distributors that take a CIO-led or strategic asset allocation-led approach where there is a clear target for private markets.

For Jennings, in an ideal scenario, the relationship manager would consult the client as to their preferences in terms of closed-end versus open-end funds and core diversified holdings versus areas of particular conviction, and then present a selection of suitable underlying investments. The client would choose what they want or outsource decision-making to the advisor through a discretionary mandate.

Perpetual evolution

From a product construction perspective, this is how the industry is expected to develop – what Carlyle’s Clifford positions as “an evolution from the core offerings available today to offerings that are more specific.” Evergreen products currently positioned as highlights packages of asset classes will be replaced or augmented by those facilitating exposure to certain themes or even single companies.

“What we will see next is the building blocks required in a portfolio – value-added infrastructure, technology, healthcare. The blocks will become ever more minute so people can choose what they like,” said EQT’s Yeo. “If you look at mutual funds, they started very wide and then became more niche. It will be similar for evergreens.”

Partners Group’s latest innovation, launched with BlackRock and at present limited to the US, is intended to replicate part of the mutual fund experience. Clients choose one of three risk profiles, each correlated to a series of private markets funds offered by Partners Group and BlackRock [NYSE:BLK] – described as building blocks – and then fill out a single subscription document instead of one for each fund.

If evergreens lower the structural barriers to entry by setting the minimum commitment at USD 25,000 instead of several million and removing capital call and distribution management, this goes to work on the administrative barriers. Yet numerous industry participants, while they accept that evergreens will play an ever-larger role in private equity, emphasize the importance of getting the basics right.

Product proliferation has given rise to two main risks. First, that certain strategies are not suitable for an evergreen construct, for example by having insufficient underlying transaction volume to meet liquidity needs. Second, that client bases will not be diversified enough and perhaps skewed towards geographies where there is a propensity to trade in and out more frequently.

Edwin Chan, head of client solutions for Asia Pacific at iCapital, a provider of technology to banks and asset managers that facilitates private wealth access to private markets, highlighted the likely next-order impact on smaller players. “When we saw liquidity runs last year, the managers were big enough to handle it. This would be much harder with products that don’t have scale,” he said.

In this way, bullishness on the long-term prospects for evergreens is entwined with concerns that growth should not come at the expense of discipline. Asked whether minimum commitment sizes should be reduced to enable wider access, Van of Endowus said he would prefer to see greater focus on ensuring investors understand the product set and how it should be used to achieve wealth goals.

“The danger of reducing the minimum commitment is that you might have a lot more people invested in the product, but you probably end up with more people who don’t understand the risks of the product and the illiquid nature of its underlying assets,” he added. “This is where education is so important.”