Evergreen vs Drawdown Funds
Definition
A drawdown fund is the traditional closed-end private fund: investors commit capital at closing, the manager calls it over a three-to-five-year investment period as deals are found, proceeds are distributed as investments are sold, and the fund ends after ten to twelve years. An evergreen fund has no end date: investors buy in with cash at the current net asset value, the manager keeps the capital invested and reinvests proceeds indefinitely, new investors are admitted continuously, and liquidity comes from periodic redemptions at NAV, usually quarterly and capped at a percentage of the fund. Interval funds, tender-offer funds, non-traded BDCs and REITs, and most semi-liquid private credit and private equity vehicles sold to individuals are evergreen; the institutional funds those vehicles invest in are mostly drawdown. The choice changes the fee base, the return profile, who bears the cost of liquidity, and what a reported return means.
Why it matters
Almost everything sold to individuals as private markets access in the last five years is evergreen: interval funds, tender-offer funds, non-traded BDCs and REITs, semi-liquid private equity vehicles. Almost everything those vehicles buy is drawdown. The individual is therefore paying for a conversion, from commitments and calls into cash and quarterly windows, and the conversion has a price: fees on undeployed liquidity sleeves, entry at a manager-set NAV, gates when markets fall, and performance figures that cannot be compared with the multiples and IRRs the underlying funds report. Understanding which structure you are in, and which structure the numbers you are shown come from, is the first step in reading any private markets pitch.
Common misconceptions
- •Evergreen does not mean liquid. Quarterly redemption at 5 percent of NAV means a full exit from a heavily requested fund can take years; the structure is semi-liquid at best and illiquid under stress.
- •A drawdown fund's IRR and an evergreen fund's annualized return are not comparable. The first is a money-weighted rate on cash flows the manager timed; the second is a time-weighted series of NAV marks. Neither is the return a specific investor received.
- •Evergreen fees are not lower. They are often a lower percentage on a larger, continuously growing base with no step-down and no end date; over ten years the total can exceed a drawdown fund's.
- •NAV is not a price. In a drawdown fund NAV is a reporting figure; in an evergreen fund it is the price at which every purchase and redemption clears, so a mark that is too high transfers value from new buyers to sellers and vice versa.
Technical details
The two structures side by side
Capital: drawdown calls a commitment over three to five years; evergreen takes cash at subscription.
Term: drawdown ends after ten to twelve years plus extensions; evergreen has none.
Exit: drawdown returns cash as investments are sold, with secondary sale the only early exit; evergreen redeems at NAV in periodic windows subject to gates.
Fee base: drawdown charges on commitments then invested cost; evergreen charges on net assets including unrealized gains.
Incentive: drawdown pays carry through a waterfall after capital and pref are returned, with clawback; evergreen pays incentive fees periodically on income or NAV gains above a high-water mark, without a whole-fund true-up.
Return reporting: drawdown reports IRR and multiples on realized cash flows; evergreen reports time-weighted NAV returns.
Entry: drawdown investors enter at cost at closing; evergreen investors enter at NAV, whenever they subscribe.
Worked example: the same $100,000 in each
Drawdown: the investor commits $100,000. Calls of $20,000 to $30,000 arrive over four years; distributions begin in year four and finish in year ten. Peak cash invested is around $75,000 (calls net of early distributions). Fees run about 2 percent on the $100,000 commitment for five years, then on invested cost. Net multiple 1.7x, IRR 14 percent, DPI reaches 1.0x in year seven.
Evergreen: the investor buys $100,000 of shares at NAV on day one. Fees run 1.5 percent on net assets from day one plus a 12.5 percent incentive fee on income. The fund holds 15 percent in a liquidity sleeve yielding 4 percent. The investor's NAV compounds at about 9 percent net; after ten years the position is worth about $237,000 if never redeemed, and the investor could have redeemed 5 percent a quarter in any window that was not gated.
The drawdown investor received more return per dollar actually invested and less per dollar committed, had no control over timing, and could not leave. The evergreen investor had full exposure from day one, paid fees on the full amount from day one, and could leave in stages. Which is better depends on what the investor needed the money for and when.
The evergreen vehicles individuals actually buy
Interval funds: registered under the Investment Company Act, Rule 23c-3 repurchases of 5 to 25 percent of shares at NAV at fixed intervals; daily NAV, 1099 reporting, no accreditation requirement.
Tender-offer funds: registered, repurchases at the board's discretion rather than on a fixed schedule; usually accredited or qualified client only.
Non-traded BDCs and REITs: registered but not listed, monthly or quarterly share repurchase programs commonly capped at 5 percent a quarter, NAV set monthly by the adviser; the vehicles that gated in 2022 to 2024.
Semi-liquid private funds: 3(c)(7) vehicles for qualified purchasers with quarterly redemption at the manager's discretion; the structure behind most private equity products on wealth platforms.
Access funds to drawdown funds: not evergreen; the feeder passes the master's calls and distributions through, so the individual has a drawdown experience with a second fee layer.
What to watch in an evergreen fund
Valuation policy: who marks the illiquid holdings, how often, and whether an independent valuation agent is involved; the NAV is the transaction price.
Liquidity sleeve: the share of assets held in cash and liquid securities to fund redemptions, and its drag on returns.
Gate history: whether the fund has ever pro-rated a redemption window, and the queue if it has.
Incentive fee mechanics: high-water mark or not, hurdle or not, whether losses in one period offset fees in the next.
Fund-level leverage: many evergreen credit and real estate vehicles borrow to enhance yield, which amplifies both returns and the pressure of a redemption run.
What to watch in a drawdown fund
Unfunded commitment: the cash you must keep available and the default remedies if you do not.
Recycling: whether early distributions can be reinvested rather than returned.
Fee step-down and end of the investment period: when the fee base shifts from commitments to invested cost.
Extensions: how many years the manager can add, and who consents.
Secondary market: the only exit, at a discount to NAV that widens in stress.
Frequently asked questions
- What is the difference between an evergreen fund and a drawdown fund?
- When you pay and when you get out. In a drawdown fund you commit an amount and pay it in pieces over several years as the manager calls it, then receive cash back as investments are sold, with no way to leave early except selling your interest in the secondary market. In an evergreen fund you pay the full amount at once, the money stays invested indefinitely, and you exit by redeeming at NAV in a periodic window, subject to caps.
- Which is better for an individual investor?
- Evergreen structures fit most individuals better: no capital calls to manage, no default risk on unfunded commitments, immediate exposure, smaller minimums and a redemption path. The costs are that you pay fees on the whole amount from day one, you enter at a NAV the manager calculated, redemptions can be gated when you most want them, and the fund's reported return is a time-weighted NAV series rather than cash actually returned.
- Why do evergreen funds have no J-curve?
- Because a new investor buys into an existing, already-invested portfolio at NAV, so there is no period of fees and expenses on undeployed capital and no early write-downs on immature investments. The J-curve still existed for the fund's first investors; a later entrant simply arrives after it. The trade is that the entrant also pays the mature portfolio's price, including any manager markup embedded in NAV.
- What is a redemption gate?
- A cap on how much of the fund can be redeemed in a period, commonly 5 percent of NAV a quarter for interval funds and non-traded BDCs and REITs. When requests exceed the cap, every investor is paid pro rata and the balance carries to the next window. Gates protect remaining investors from forced sales; they also mean liquidity is a feature of calm markets. Several non-traded REITs and private credit funds gated redemptions in 2022 to 2024.
- How do fees differ between the two?
- A drawdown fund charges its management fee on committed capital during the investment period and on invested capital after, and pays carry through a waterfall at the end. An evergreen fund charges its fee on net assets continuously, so the fee base includes unrealized gains, and pays an incentive fee periodically on income, on NAV appreciation above a high-water mark, or both, without a whole-fund clawback. Evergreen fees are usually lower as a percentage but are paid on a larger base for longer.
- Can an evergreen fund hold the same assets as a drawdown fund?
- Mostly. Evergreen private equity and credit funds hold illiquid positions, often through the same deals or through interests in drawdown funds, while keeping a liquidity sleeve of cash, listed securities or credit lines to meet redemptions. The sleeve dilutes returns, the redemption right can force sales at bad times, and the fund's NAV has to be estimated for illiquid holdings every period, which is why valuation policy matters more in an evergreen vehicle.