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This New Fund Structure Helps Retail Clients Access Private Markets

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What You Need to Know

  • New fund structures are democratizing private markets.
  • Individuals may want to take a page from the institutional investors’ playbook.
  • Evergreen funds have overcome some hurdles that once precluded individuals from investing in private markets.

The 60/40 stock and bond mix has long been the industry standard for individual investor portfolios. But it may not be the risk/return profile that cemented its legacy. And it could change as access to new investment areas improves.

Large minimums, complex tax reporting, liquidity constraints and longer time horizons combined to prevent many high-net-worth and mass affluent investors from gaining access to the private markets and alternative asset classes. This left individuals and their advisors little choice than to optimize a portfolio with the equity and bond strategies available to them.

However, new fund structures are democratizing private markets. As they do, high-net-worth portfolios could look a lot more like those of institutional investors.

The Institutional Portfolio Evolution

Private market investments have long been a staple of institutional portfolios. Pensions and endowments, generally, have private markets allocations of 10%–20%, according to the McKinsey Global Private Markets Review 2021.

It’s hard to argue their decision. Our research found that private equity and private credit have outperformed global public equity and credit markets respectively 19 of the last 20 years. They’ve also offered institutional investors diversification benefits and access to a much larger investable universe than public markets, where the number of publicly listed companies has fallen by more than 30% over the last 20 years, according to research by Professor Jay R. Ritter of the University of Florida.

Given some of these potential benefits, individuals may want to take a page from the institutional investors’ playbook.

In recent years, private market managers have sought to address some of the structural barriers that prevented affluent clients from accessing the asset class. A new fund structure — often called an evergreen fund — takes aim at several of the impediments. Each fund has its own nuances, but some of the issues that evergreen structures seek to address include:

Investment minimums: Historically, the minimums for private equity partnerships were around $5 to $10 million, probably one of the biggest impediments to this investment. Evergreen funds offer a lower entry point, typically ranging from $50,000 to $100,000, depending on the fund.

Improved Liquidity: Long lockup periods also have been prohibitive to individual investors. Traditional private equity partnerships include a 10- to 12-year commitment.

Evergreen funds, however, offer monthly or quarterly redemptions. To be clear, individuals shouldn’t approach private markets with a short time horizon in mind. Private asset investing owes some of its success to realizing value creation over several years, not months. But a vehicle that allows greater liquidity should nevertheless remove a hurdle for an individual who isn’t investing in perpetuity the way an endowment or foundation might.

Immediate exposure: Another difference between evergreen funds and traditional private partnerships is that investors can subscribe into the evergreen fund on a monthly or periodic basis. Many of these funds offer new investors a built-out and diverse pool of existing assets on day one. Investors not able to diversify into private assets, the quick deployment into assets may be favorable to the traditional model, in which funds are raised for one or two years, and capital is deployed over several more.

Tax complexity: Historically, individual investors had to file a K-1 for their investment in an illiquid private partnership. The cumbersome document didn’t necessarily prevent private market investing, but it likely didn’t encourage it, either. The lower minimums and liquidity of an evergreen fund allow individuals to report the investment with a simpler 1099, which investors, accountants and advisors may find preferable.

As advisors and their clients become familiar with these new structures, don’t be surprised to see more participating in the asset class. The traditional 60/40 mix of high-net-worth portfolios may start to look quite different going forward.


Drew Schardt is the managing director of Hamilton Lane.