Pathways to ‘evergreen’ fund distribution

Against a volatile market backdrop, semi liquid evergreen private markets funds have notched up considerable growth in recent years.

Growing demand has seen semi-liquid funds shift from a niche market preserve of institutional investors to become increasingly embraced by high-net-worth investors through a process of ‘democratization.’

While recent liquidity challenges in the US private credit markets have unsettled some investors, prompting significant redemptions from some semi-liquid funds, wider interest in the products continues to grow.

Yet for all this, key distribution challenges remain in markets such as Europe.

Why distribution strategy is as important as your investment strategy

Despite the growing number of products, a lack of standardization of product features means some distributors and sales teams can struggle to get capital into funds they hope to market to European clients.

European promoters can no longer launch funds on a ‘build it and they will come’ basis. As the market becomes ever more saturated with products, a successful launch will most likely need seed funding from institutional investors, private banks, or the promoter’s own balance sheet.

However, attracting this funding is becoming difficult. Many private banks, a key target market for evergreen fund promoters, now seek partnerships with established players or wait for funds to gain traction and credible track records before they are willing to back them.

From an investment standpoint, product features such as soft locks can create manual overlays and frictions in the trade process. Operational hurdles can be further compounded in Europe by their diverse distribution channels, plethora of platforms, and shifting regulatory landscape.

These are not problems unique to the semi-liquid fund market. Distributing almost any fund is generally harder in Europe thanks to market fragmentation and local idiosyncrasies. Although funds may be created under one regulatory framework and one set of rules, local nuances are common. Getting distribution right in Europe, while potentially rewarding, can also prove a very steep learning curve.

Developing a robust operating model makes it easier for clients to buy these products and can play a huge role in their success. Indeed, without a model that is fit for purpose fund promoters are likely to struggle in raising assets.

Accessing new investors

One key challenge facing evergreen fund promoters is adapting to match the needs of a changing target audience.

While frameworks such as the European Long-Term Investment Fund ‘ELTIF 2.0’ can help streamline access to evergreen funds for some non-institutional investors, and managers have worked hard to develop a product set that can match a broad range of client needs, the market is still in a relatively early stage of its evolution.

It is tempting to see a new vista of mass market retail investors opening up to adopt these products as democratization of these products takes root.

In fact, the retailization of the market has so far tended to focus on ultra-high net worth and high net worth clients, not typical individual retail investors. Private bank networks have become a key business focus for many asset managers in this space.

Why liquidity matters

Evergreen funds are semi-liquid products which as their name suggests offer only limited liquidity. These funds also tend to be a longer-term investment proposition more suitable for professional investors than less experienced retail investors.

It is clear many European evergreen fund sales teams need to formulate accurate, understandable, and compelling narratives about these products and indeed their intended target market prior to launching sales initiatives. Aspects such as liquidity levels and the ‘gating’ terms of evergreen funds are critical and need clear explanation to clients. It is crucial investors know what to expect from their funds and are aware of what could be incorrectly perceived as potential downsides but are in fact designed to protect the investor.

From a sales perspective it is also worth remembering funds are sold in Europe not bought. There is a lot of investment choice in Europe and promoters must be open to hearing what their investors actually want and work to provide them with optimal solutions.

For all this the European evergreen fund market does hold some highly attractive potential. Yet education, building the right distribution channels and operating models and providing clearly differentiated products in an increasingly crowded market are just some of the steps that may prove necessary in achieving successful market outcomes.

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