Evergreen Funds vs. Closed-End Funds: Understanding Alternative Investment Structures

Alternative investments can help diversify a portfolio beyond traditional stocks and bonds. For high earning families, entrepreneurs, and investors in the wealth accumulation phase, understanding the structure of these investments is critical. Two common structures for alternatives are evergreen funds and closed-end funds. While both provide access to private or less liquid assets, they differ in liquidity, investment horizon, and flexibility.

What Are Evergreen Funds?

Evergreen funds are open-ended investment structures that continuously accept new capital and allow investors to redeem their shares at regular intervals.

Key Features:

• Ongoing subscriptions and redemptions: Investors can enter or exit the fund periodically, usually quarterly or annually.

• Long-term focus: Evergreen funds often invest in illiquid assets like private equity, real estate, or venture capital but allow for gradual liquidity.

• Compounding capital: Because the fund is open-ended, managers can reinvest distributions and gains into new opportunities without having to return capital to investors immediately.

Pros:

• Flexibility to add or withdraw capital over time

• Can benefit from compounding and reinvestment

• Potentially smoother liquidity for investors compared to closed-end structures

Considerations:

• Redemption periods may still be limited and redemption “gates” can be put up by management teams

• Valuations can be less transparent than publicly traded alternatives

• Typically requires a longer investment horizon

What Are Closed-End Funds?

Closed-end funds raise a fixed amount of capital upfront, which is then deployed according to a defined investment strategy. Once the capital is raised, no new investments are accepted until a new fund is launched.

Key Features:

• Fixed investment period: Capital is locked in for the life of the fund, often 7–12 years for private equity or similar alternatives.

• Defined exit strategy: Investors typically receive returns through scheduled distributions or at the end of the fund’s term.

• Limited liquidity: Secondary market options are limited, and early redemptions are usually not allowed.

Pros:

• Investment strategy and fund life are clearly defined

• Can pursue longer-term, illiquid strategies without needing to manage ongoing subscriptions

• Potential for higher returns due to concentrated deployment of capital

Considerations:

• Typically zero flexibility to access funds before the investment period ends

• Requires strong conviction in the underlying assets and strategy

• Is less suitable for investors needing liquidity

Which Structure Is Right for You?

Choosing between an evergreen fund and a closed-end fund depends on your investment goals, time horizon, and liquidity needs:

• Evergreen funds can be suitable for investors seeking ongoing access to alternative investments with periodic liquidity (if available).

• Closed-end funds may appeal to those focused on long-term growth in illiquid strategies, where capital can remain invested for multiple years.