Unlike a traditional closed-ended fund structure, which has a finite investment lifecycle, evergreens are perpetual investment vehicles. This means that when a private bank or wealth manager selects an evergreen, it sits on their platform indefinitely. There is no sell-by date. As a result, product education and ongoing engagement are vital. Advisors have to be 100% clear on the fund’s value proposition and how it is managed to ensure that they convey accurate information to their end clients.
This is a three-dimensional relationship: one in which the GP educates the advisor who in turn educates and advises the end client. For GPs who are used to direct relationships with institutional investors, this level of intermediation via a distribution partner places a higher burden of responsibility on the quality of their educational materials.
“The gatekeepers are looking for trusted relationships where they’re not going to put their clients’ money at risk, and in turn risk losing the relationship,” remarked Richard Clarke-Jervoise, Managing Director, ODDO BHF, the European financial group, at IPEM Cannes Wealth.
Key Steps to Building an Education Programme
Private banks want close, trusted partnerships with fund managers. That means being transparent and consistent when providing ongoing educational materials. It is also important to avoid pushing too hard and develop relationships over the mid- to long-term. Clients tend to decide at their own individual pace, so a well-aligned relationship with them matters a lot.
With evergreens, when it comes to market and salesforce education it is very much an ongoing process. The essential elements of the prospectus must be kept up to date at all times.
This will require GPs to notably increase the cadence of their content marketing as part of the ongoing relationship with distribution partners. From developing marketing materials that explain the fund’s investment proposition, how the team manages risk, to regular market updates/trends, a lot of work has to go in to educating RIAs and wealth advisors in clear, jargon-free language. After all, if they don’t understand what the product is, they will not consider presenting it to their clients, for risk of mis-selling.
A new report published by Adams Street Partners, entitled “The Rise of Private Wealth in Private Markets”, which surveyed 100 financial advisors, found that 69% of advisors say the complexity of private markets makes it difficult to communicate effectively with clients. Less than half (49%) rate their own expertise as “advanced”—while client understanding trails, with just 32% of advisors reporting that their clients have “advanced knowledge”.
Regardless of whether GPs choose to build private wealth solutions as closed-ended or open-ended structures, they have a burden of responsibility in ensuring distribution partners are properly educated on every aspect of the fund’s mechanics; indeed, some GPs refuse to even use the term evergreen or semi-liquid as it can easily lead to misunderstandings, in what is, after all, a long-term illiquid asset class.
In today’s uncertain market environment, investors will want to understand how higher rates impact private equity returns, how GPs select the right companies to invest in, how they think about leverage etc. Unlike a closed-ended fund, which has a fixed investment lifecycle, evergreens are designed to remain on the shelf indefinitely. This places far more importance on maintaining regular dialogue with advisors, and making sure they have all the right information so that the fund stays relevant.
As well as marketing materials, GPs should also consider the most effective way of developing digital content on their website to give investors and wealth advisors a steady stream of insights on all aspects of private markets, from explaining how private equity works, to the main advantages of a co-investment…the list goes on.
GPs who take the requisite care and time to train advisors to position their fund(s) is paramount to ensuring they have the right end investors at the end of the day.
The primary aim of a well-constructed education programme should be that the product is not just well distributed, but that it is included in a global allocation.
“When a private bank agrees to work with us, it's the beginning of the journey because we need to train the advisors and their clients,” says Ardian’s Erwan Paugam. “We train the advisors to position our funds in a way that is in line with what we want in terms of risk, in terms of philosophy, in terms of process. This is the key to making sure we have the right end investors in our funds.”
The way that a GP communicates should go beyond merely explaining ‘what’ private markets are, and what the fund proposition is, however. Emphasis should also be placed on developing materials that clearly articulate why it is a good time to discuss private markets with investors, instead of just thinking about, for example, fixed maturity products in fixed income and structural notes.
One of the main points that GPs who are already actively managing evergreens get asked by wealth advisors relates to deployment capacity.
The reality is liquidity in is more complicated than liquidity out, especially in the early stages of running an evergreen fund. GPs will want to avoid situations where investors coming in have to wait for access because the fund has limited deployment capacity. From an education and training perspective, areas of focus could include:
To address the liquidity mismatch, evergreens often maintain a liquidity sleeve of cash or liquid assets. However, this can introduce a drag on overall fund performance; this too is another aspect of the education process which wealth advisors need to understand when conducting their due diligence.
Marketing in local languages across Europe and ensuring that the documentation is properly in place can also add a significant layer of cost and complexity at the outset.
iii) Explain the risks
GPs need to also be aware of the fact that educating investment advisors and their end clients is entirely different compared to an institutional investor base. A closed-ended fund, with its multi-year capital lock-up and inherent illiquidity, does not have to worry about gating. But in evergreen funds, gating is part of the product design. Explaining what this is and how it works, is just one aspect of the education process.
Claire Roborel de Climens is Global Head of Private & Alternative Investments at BNP Paribas Wealth Management, the Eurozone’s largest private bank. She explained to delegates during IPEM Cannes Wealth that she expects to see more gating to be activated in evergreens to protect investors, “and we absolutely need to explain that,” adding: “For us, it's very important to partner with GPs who have the scale, who will be able to raise money with a very diversified investor base to manage the liquidity needs of evergreens.”
To close the information gap, the first step is to educate advisors.
Private banks like BNP Paribas have developed training models as part of their certification programme. This has included collaboration with GPs’ academies so as to provide real-life case studies.
“The second step is to educate our clients,” said Roborel de Climens, speaking on the panel Closing The Information Gap: Best Practices For Distributor And Investor Readiness. “We do a lot of educational videos for the clients. We organise roadshows with GPs and client events with our CIO to explain the benefits of private assets in a financial portfolio. Also, we have created a digital investor platform for our clients to have friendly reporting and to simplify processes with an electronic signature.”
To ramp up its education efforts, BPIFrance has launched an online platform with France Invest to share information with retail investors. “We conduct a survey once a year and the level of awareness and understanding of the asset class among retail investors is pretty low. And even among financial advisors there is a lot of educational work to do,” noted Gorka Gonzalez, Head of Retail, BPIFrance.
For wealth platforms, one of the questions that often gets raised in regards to evergreen funds is accessibility. Another common question relates to the challenge of managing illiquid unregulated assets - cashflows, valuation policies etc. ”Our clients and partners want the experience to be smooth to enhance reporting. We can ease the pain but there’s a lot to do on the learning curve…how to manage a capital call, how to reflect a distribution, how to make regulated structures available in a compliance framework,” stated David Liebmann, Deputy Sales Director Europe, Utmost Wealth Solutions, which has over GBP100 billon of assets under administration.
Liquidity management is a core element of the educational drive, requiring investment firms to take care in explaining how liquidity is generated and provisioned on a continual basis to meet quarterly redemptions.
Financial advisors and mass affluent investors who may have no experience whatsoever of private markets - compared to more sophisticated HNW investors and family offices - need to understand the basics: What is private equity? What is a buyout fund versus a venture capital fund? How do GPs generate value? How long is a typical investment? What is a distribution? How do higher interest rates impact private equity returns? And so on.
Private banks are further along the curve in regards to advisor expertise but nevertheless, they acknowledge that continued education will be vital. At Union Bancaire Privee, for example, its private markets team is starting to develop discretionary model portfolios based on pre-determined outcomes: i.e. income, growth, balance.
“We are rolling out evergreens not by doing campaigns on specific products but by saying, ‘Look, if you want to enhance the income part of your portfolio, subscribe to private credit solutions and do a bit of infrastructure, if you want it to be more balanced, add private equity and here is how you should do the weighings.’ I think that portfolio narrative is paramount to change investor perceptions and allow significant scale of adoption,” commented Gaetan Aversano, Deputy Head of Private Markets Group, Union Bancaire Privee. He was speaking on the panel What Wealth Clients Really Want: Surprising Lessons Learned From The Field.
The more discretionary pools of capital begin to grow, the more likely evergreens will experience mass retail adoption. This dual track - providing discretionary model portfolios that include an ‘evergreen sleeve’ to mass affluent/retail investors alongside custom, advisory-led mandates to HNW/UHNW investors - could be an important catalyst to drive the scale of adoption referred to by Aversano.
Clarity of message will be crucial to driving this AUM growth over the coming years. As figure 1 below shows, polling at IPEM Cannes Wealth confirmed that creating marketing and educational resources will be a priority as private equity groups move to capture market share within private wealth.
Private wealth partners span a wide spectrum when it comes to private markets education.
Marquee investment groups who partner with global bank behemoths like JP Morgan are under less pressure to facilitate knowledge sharing because of its long-term history of investing in alternative assets. Fact is, JP Morgan Private Bank’s core team of advisors are well-versed.
“Our global private bank clients have been looking at alternatives since the early 2000s. We've built out a very strong core of why we use alternatives; what are the different strategies doing a portfolio? Why is manager selection so important? We have a core capability of education. We're not dependent on the class of fund manager who have education as a value proposal,” says Joshua Helfat, Head of Private Investments for Global Alternative Investment Solutions in a phone interview.
Over time, the business has learned to innovate and find the best way to hold these assets, including semi-liquid vehicles. As part of its ongoing manager selection programme, if the team has conviction that a manager’s fund strategy is unique, they will explore a partnership opportunity, potentially providing an access route to clients via an evergreen structure.
“In private credit, a lot of direct lending is done in the closed-ended space. When we came to the conclusion senior loans shouldn't be in a drawdown fund, we converted to an evergreen format. Our business has always been thoughtful about asset type, manager selection and the way to own alternatives. We start by explaining the dynamics of a transaction: What does a private credit loan look like? Is it a junior or senior? How does it work? Then, we find a great fund manager to support an idea. The benefit of the size and scale of our franchise is we have the time and attention to explain that to our clients,” adds Helfat.
One only has to look at the explosion of ESG/sustainability funds in recent years to understand the risk of mis-representation. Greenwashing quickly became a symptom of managers piling in and exploiting ‘ESG’ as a marketing tool to mis-sell funds to investors.
As GPs move deeper into private wealth, they will need to increase the cadence of their content marketing. From developing marketing materials that explain the fund’s investment proposition, how the team manages risk, to regular market updates/trends, a lot of work has to go in to educating RIAs and wealth advisors in clear, jargon-free language.
The last thing private wealth will want is the emergence of ‘evergreen washing’, where GPs develop products that fail to deliver exactly what they claim to say on the label. Which is, again, why education is so important. GPs have a duty to ensure they have the requisite internal resources to develop quality, educational materials that truly reflect the industry, the asset class, and the fund’s investment objectives.
Raluca Jochmann, Managing Director, Head of Private Markets Solutions at Allianz Global Investors remarked that mis-selling the product as liquid or even semi-liquid and not explaining what it means is one of the biggest risks the industry faces: “I think the word ‘semi-liquid’ is misleading, I prefer evergreen more. It is really selling the convenience of having no capital calls, receiving exposure to a portfolio from day one and having potentially the option, in the future, to redeem.”
“Investors have to understand exactly what they are buying,” stressed Markus Pimpl, Co-Head Private Wealth Europe, Partners Group, one of the earliest pioneers in designing evergreen fund solutions; their first evergreen launched in 2001.
Right now, wealth partners are having to navigate a fast growing universe of evergreens, many of which are first-time funds with no track record to speak of.
“You need the team and the resources in place to do this. We trained 600 advisors last year in our headquarters. There are many other asset managers pushing in to private markets but they barely understand them; there are great peers of ours educating advisors but there are also big differences,” cautioned Pimpl.
As investment managers develop new wealth solutions, the burden of responsibility will be higher than the institutional space in terms of providing clear, well-constructed educational resources. The risks of not doing so could be reputationally fatal.