The Evergreen Fund Structure

By Harry Hall, Director of Fundraising

Within real estate debt, institutional investors are increasingly turning their attention to evergreen funds. Distinguished by its hybrid features, the evergreen structure may particularly fit lending strategies by offering investors a flexible approach and adaptability.

In traditional closed-ended funds, investor capital is locked up for a number of years to match the deployment and resolution of underlying assets. In residential debt, however, asset duration is typically much shorter, and a period of recycling is expected within the portfolio. Therefore, in a well-diversified portfolio, managers need to have strong and reliable origination capabilities to continue sourcing high-quality loans. This also means capital can be deployed quickly and efficiently, minimising cash drag for investors.

Given the natural portfolio recycling, evergreen structures can give the benefits of closed-ended funds, but with potentially more optionality and flexibility for investors. 

Similar to closed-ended structures, there is an initial lock-up period, although this is significantly shorter (~2 years) than in traditional closed-ended structures (typically 4-6 years). This lock-up allows certainty of deployment to portfolio managers at launch and ‘institutionalises’ the capital base, attracting investors focused on longer-term investment horizons. 

Following the initial lock-up there is a rolling investment period where investors can ‘stay as long as they like’, with the option to re-up or redeem (quarterly). This open-ended aspect is a feature of evergreen funds and gives managers the ability to continuously originate loans and recycle the portfolio. It also potentially allows investors more flexibility to manage their portfolio, gaining exposure or generating liquidity.

When it comes to liquidity, evergreen structures behave more similarly to their closed-ended counterparts. If a redemption is placed, it enters a run-off portfolio where a vertical slice of the current portfolio is allocated to fulfil the request. As the allocated loans generate liquidity, a prorated amount is paid out to the redemption until it is fulfilled. This means portfolio managers can generate liquidity in the normal course of business, in line with the underlying assets rather than being held to a defined payback period. This run-off typically targets 12-18 months.

So why are investors increasingly considering evergreen structures for real estate debt?

They harbour the benefits of a closed-ended structure whilst giving added flexibility and, in some instances, liquidity. As the real estate lending sector continues to evolve, the benefits of an evergreen fund structure provide a compelling offering from managers with the ability to consistently originate and manage high-quality loans.

 

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