Evergreen funds have rightly been heralded as a key solution to balance the benefits of exposure to illiquid asset classes while attempting to meet investors’ liquidity preferences. However, that balance becomes precarious during periods of net redemptions (i.e., when new redemptions are greater than new subscriptions), which can frustrate the practical liquidity that evergreen vehicles offer by forcing redeeming investors into liquidating accounts.

A solution to that problem may exist in creating a structure that incentivizes traditional seed investors or other strategic capital with a long-term mandate to backstop net redemptions via a committed equity backstop facility. That approach may offer substantial benefits to both strategic investors willing to assume that role and to fund investors for whom liquidity may otherwise be illusory, as well as to GPs of evergreen funds by improving their fundraising opportunities and overall fund stability.

In this Private Equity Law Report article, Business Transactions partner Gary Anderson describes how a committed equity backstop facility would practically work by leveraging traditional seeding arrangements; some of the economic benefits, additional protections and bolstered rights that could inure to strategic investors; advantages that GPs and fund investors could reap; its potential impact on fundraising; and how it compares to other forms of liquidity solutions.

Click here to read the article.