Evergreen secondary funds let new investors capture immediate value from discounted purchases, but the advantage diminishes as assets grow, making timing critical.
After investing client assets in private equity for more than 25 years, I’ve come to believe that one of the biggest advantages of evergreen secondary funds is also one of the least understood.
Secondary funds purchase existing private equity investments from institutions that want liquidity, often a pension fund or an endowment, selling a stake for reasons that have nothing to do with performance, such as rebalancing. These sales often occur at discounts to their position’s most recently reported net asset values. When a buyer acquires those assets, it captures the benefit of purchasing quality investments below their NAV. The underlying companies haven’t changed. The gain comes purely from the price paid.
Imagine a $250 million evergreen fund that raises $100 million in new capital over a four-month period and deploys it into secondary positions at a 20% discount. That new investment controls roughly $125 million in underlying assets, creating $25 million of immediate value for the fund, before any change in the performance or valuation of the underlying companies. From the perspective of a hypothetical investor, a $100,000 investment would be worth $107,140 in four months. That’s why I believe the earliest investors in a new evergreen secondary fund may capture a disproportionate share of the initial NAV lift while the fund is relatively small. Inside a $3 billion fund, the identical transaction barely moves the needle. The same $100,000 investment would be worth $100,800.
This is not a guarantee of superior returns. Long-term performance will still depend on the quality of the managers. Firms like HarbourVest, Ardian, Hamilton Lane and Coller Capital have launched evergreen secondary-oriented vehicles that have reported strong early results, helped in part by buying seasoned assets at a discount.
Morningstar has argued these funds’ early returns are driven more by the pace of incoming cash than by actual investment performance. But the NAV itself isn’t being pulled from thin air. It comes from the original manager’s own audited books. The seller agreed to the discount with full knowledge of what the position was worth, and the buyer isn’t marking anything up beyond what an independent auditor had already certified.
This structure also sidesteps the J-curve that trips up first-time private equity investors. A new drawdown fund invests a blind pool of capital over several years, and clients typically don’t see a positive return until year three or four. An evergreen secondaries fund is buying into a portfolio that’s already six to eight years seasoned, with no blind pool and no multi-year wait. That makes it a natural way for a client who has never owned private equity before to build confidence to consider other alternatives later.
A headline return number is the wrong place for an advisor’s due diligence to start. Ask how large the fund is today relative to its launch size, since that determines whether the early NAV lift has already played out. Ask whether the fund invests across multiple managers and vintages or concentrates in a single manager’s fund, since a multi-manager secondaries fund spreads that risk in a way a single commitment cannot.
The strongest argument for the evergreen structure is what happens at the other end of a traditional drawdown fund’s life, when a manager can’t unwind the last 10% of a portfolio and sells it to a tail-end buyer at a steep discount because there’s no other exit. In a single-vintage fund, that loss lands on every investor still in it. In an evergreen fund that has grown to several times its original size, the same forced sale becomes a potential rounding error, spread across a much larger pool of assets.
The preference for liquidity is legitimate on its own, regardless of how the early NAV lift gets calculated. Sometimes, the greatest advantage is simply getting there first.