Jeremy Held, CFA, Managing Director, Evergreen Platform at Bow River Capital, joined Keith Black, Managing Director of RIA Channel, to discuss how companies are staying private longer and how evergreen funds make private equity more accessible to individual investors.
Evergreen funds are becoming one of the most popular ways to access alternative investments. Institutional investors have used alternative investments as portfolio staples for decades. Accessing alternative investments has been more challenging for Individual investors and their wealth advisors. A key benefit of evergreen funds for both institutional and individual investors is that capital invested in evergreen funds is immediately put to work. Previously, institutional investors were concerned about the capital calls and distributions in drawdown funds that often left them with substantial dry powder. Individual investors find evergreen funds attractive due to lower minimum investment sizes, broadly diversified portfolios, and simplified performance and tax reporting.
Private equity investors have a choice of investing in primary funds, secondary assets, and co-investments, each of which has its own pros and cons. Co-investments are direct investments in individual companies. Secondary portfolios are purchased from other investors. Held notes that the most effective way to diversify an evergreen fund is to have access to both co-investments and secondaries. Co-investments are great at providing access to companies that may provide high long-term returns but have limitations relative to diversification and liquidity. Secondaries are good for liquidity and diversification, as the assets are already three to five years into their value creation timeline. The combination of secondaries and co-investments can provide a more liquid portfolio with strong potential returns.
Almost 90% of US companies with over 500 employees and $100 million in revenue are privately held. Most of those companies are in the middle market or the lower middle market, with profits typically below $50 million to $75 million. Bow River Capital likes these smaller companies due to the number of levers for value creation. Getting into a company early provides greater opportunities for growth and enhances the value creation process. Larger companies with over $5 billion valuations have already experienced substantial growth, may be efficiently run, and have fewer options for investors to exit. Companies with valuations of $100 million to $1 billion have more potential buyers, including private equity and strategic buyers.
Due to the shrinking number of publicly traded companies and the growing weight on mega-cap companies, Held notes that it is difficult for investors to get complete exposure to small and mid-cap companies without investing in private equity. Investors who think holistically about portfolio construction will likely invest in real estate, equity, and credit in both the private and public markets. Most investors don’t need to have 100% of their assets in liquid markets 100% of the time, which opens up the opportunity to invest 5% to 15% of their portfolio in evergreen funds.
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This material is for informational purposes only and contains the opinions of its presenters, which may not reflect those of New York Life Investments or its affiliates. It is not intended as investment, legal, tax, or accounting advice, nor as a recommendation or offer to buy or sell any security or adopt any investment strategy. The information does not account for individual objectives or financial situations. Investors should consult their own professional advisors before making any decisions. Opinions and information are subject to change without notice. Past performance is not indicative of future results.
Prospective investors should be aware that investments in private funds or alternative investment strategies are suitable only for individuals with adequate financial resources (“Qualified Investors”) who do not require liquidity and who can bear the economic risk, including the potential for a complete loss, of their investment. Investors are encouraged to consult their tax or legal advisors before making such investments.
Alternative investments, including hedge funds and private placements, involve significant risks such as illiquidity, limited transparency, leverage, and volatility. These investments may result in substantial losses and often lack regulatory oversight compared to mutual funds. They may also entail complex tax reporting and higher fees. Investors should be aware of additional risks from global trading and concentrated strategies.
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