Evergreen & Secondaries: When flexibility meets liquidity

Private equity has long been characterised by locked-up capital and a patience-testing wait for returns. Whilst these features support value creation, they often clash with investors’ demand for flexibility and efficient capital deployment. Two powerful trends have emerged from this demand: the evergreen (or open-ended) fund structures and secondaries.

Both trends address specific investor challenges. While evergreen structures broaden access to private equity and offer immediate exposure to a diversified portfolio, rapidly expanding secondaries represent an ideal asset class offering near-term liquidity potential while mitigating the J-curve effect (in particular, LP-led secondaries). Together, these converging trends are highly complementary: they form a solid tandem that is reshaping the way investors engage with private equity.

LIQUIDITY MANAGEMENT:

Evergreen funds must be carefully managed to accommodate periodic redemptions despite holding inherently illiquid assets. To respect potential redemptions, managers are forced to maintain a certain level of cash or highly liquid assets, which, if not properly managed, could create a structural drag on returns.

By integrating secondaries, evergreen vehicles can rely on mature assets with shorter residual lives and more predictable near-term distributions. These assets have the potential to offer near-term liquidity because they are further along in their value creation phase and closer to the end of their managers’ tenure, and hence exits or realisations.

COMPOUNDING EFFECT:

Evergreen structures are designed to naturally facilitate reinvestment. When an investment is sold, the proceeds are not returned to investors but are immediately redeployed into new opportunities, allowing potential profits to generate further profits - the very essence of compounding.

Secondary strategies amplify this dynamic: since assets acquired later in their life cycle tend to distribute cash more quickly, managers can reinvest these proceeds into new secondary opportunities. Theoretically, this shortens the reinvestment cycle, keeping capital actively deployed at high returns, which could accelerate compounding and create a virtuous cycle of continuous growth.

BOOSTING DIVERSIFICATION AND IMMEDIATE ACCESS:

Diversification is another key advantage of combining evergreen and secondary strategies, especially for LP-led focused strategies. Evergreen funds already provide investors with immediate exposure to diversified portfolios, unlike closed-end funds that gradually build holdings over several years, leaving investors exposed to blind pool risk and higher concentration early in the fund’s life cycle.

When secondaries are layered into an evergreen structure, this diversification benefit is boosted. A single LP-led secondary transaction typically involves acquiring a portfolio which may hold dozens of underlying companies. As a result, investors gain instant exposure across managers, vintages, sectors, regions, and strategies.

This level of granularity and breadth in diversification is difficult to replicate through primary commitments or direct investments alone. For investors, it means faster access to a diversified portfolio achieved from a single entry point.

The convergence of evergreen structures and the secondary market represents significant progress for private equity. By combining the liquidity profile of secondaries with the reinvestment mechanics of evergreen funds, investors can achieve a more efficient, diversified exposure to private equity whilst benefitting from more flexibility and control.

While this tandem is powerful, execution matters. Managers may fall into the trap of using secondary markets solely for their attractive entry discounts, neglecting the quality of investments, which could affect long-term profitability. Likewise, inadequate management of the liquidity component can jeopardise the effectiveness of the structure.

That’s why, at Carmignac, our rooted active management plays a key role, entailing not only skilled investment selection but also careful portfolio monitoring and liquidity management, leveraging over 35 years of expertise in public markets. This way, we ensure that Carmignac Private Evergreen stays true to its objective of offering flexibility and control.

The results are already visible: since inception on 15 May 2024, secondary investments have generated liquidity equivalent to 23%¹ of our investments in Private Assets (Distributions to Paid In or “DPI”), helping us both meet redemptions and reinvest seamlessly. At the same time, performance since inception has been driven as much by fundamental value creation as by entry discounts – demonstrating the solid foundation of the fund’s strategy.