As private markets continue to garner interest among investors, Netwealth’s series of private market reports have revealed a growing attraction to evergreen funds as a mode of accessing this asset class.
Utilising insights from a dozen key industry players in advice, Netwealth released The executive guide to private markets – three reports exploring different facets of private market usage in the advice industry.
Looking at how practice leaders are allocating private markets in client portfolios, Netwealth’s Building your value proposition with private markets report noted some variations in this regard.
For example, Charlie Viola, founding partner of Viola Private Wealth, explained his firm typically allocates around 35–40 of client portfolios to private markets, with the remaining 60–65 per cent going to traditional assets.
Looking more closely at how this works in practice, Viola said in the report that they structure portfolios across three different groups, including traditional core assets such as equities and bonds, core alternatives that offer evergreen and semi-liquid exposure, and satellite alternatives.
Meanwhile, wealth management firm Koda Capital typically allocates around a third of client portfolios to private markets. For broader alternative investments, private markets, and hedge funds and commodities, which the firm considers ‘alternatives’, asset allocations would push closer to around 50 per cent of a portfolio.
Taking a more reserved approach, Lipman Burgon, a boutique Sydney-based firm, said it only uses private markets sparingly for retail clients. Rather, it largely reserves them for high-net-worth (HNW) clients, family offices, and not-for-profits, explaining that these clients tend to be less constrained when it comes to liquidity requirements.
When it comes to determining which clients are best suited to private markets, the report said it is important for advisers to engage in clear, practical conversations about clients’ liquidity needs, resilience to market shifts, investment goals, and increased complexity in their portfolio, keeping in mind the long-term nature of typical private market assets.
Notably, all three firms largely target HNW individuals as their client base, contributing to the increased tendency to higher allocations of private markets in portfolios.
Evergreen funds
One way advisers are addressing the liquidity issue with private markets, according to another report in this series, The advanced playbook to private markets, is through the use of evergreen funds, as opposed to single asset, closed-ended structures.
Evergreen funds allow investors to make long-term investments in private companies without a fixed end date, so they are viewed as a more user-friendly structure that can provide greater liquidity.
Research by Hamilton Lane earlier this year stated evergreen funds are poised to take up at least 20 per cent of total private markets in a decade’s time. To reach that level – and assuming private markets continue to grow at their historic 11 per cent growth rate – evergreen funds would need to grow almost triple that rate, nearly 30 per cent annually.
Where traditional closed-end funds leave advisers navigating blind pool risk, complex performance metrics, and high administrative burden, Netwealth explained that evergreen funds tend to offer built-in liquidity features, immediate diversified exposure, and easier access and reporting.
On top of this, Viola said that, while traditional private market assets may provide better internal rates of return (IRR), “the money-on-money return from evergreen fully invested options will be superior”.
To this point, Netwealth found there has been a move among advisers toward evergreen funds due to their ability to provide more flexible and accessible investment formats. In fact, Lipman Burgon said it now uses more evergreen private market offerings than closed.
However, there are still limitations when using evergreen funds as they may have some restrictions on liquidity, particularly in times of stress, while advisers and clients will need to be comfortable with the valuation of funds, as calculated by the manager.
