Perennial Private Credit Market Booms:  Is it Ready for Evergreen? - Waystone

      Perennial Private Credit Market Booms: Is it Ready for Evergreen?

      Private credit experienced a remarkable evolution during the pandemic and has continued to thrive despite increased inflation, interest rate rises and associated pressure on borrowers. Compared to high yield bonds, private credit still offers considerable pick-up1, more diversification and lower market volatility. But how can this evolution marry together with the Evergreen fund structure?

      Private credit is an asset class of credit where borrower lending solutions are completed off-market (unlisted or non-publicly traded), offered by non-bank lenders. As the name suggests, the private credit market is illiquid in nature and often viewed as opaque in terms of asset valuation.

      What are Evergreen funds?

      Evergreen funds are open-ended fund structures with no fixed end date, that offer investors considerable liquidity in terms of fund subscriptions and redemptions.

      The evolution of the private credit Evergreen fund structure

      According to Pitchbook’s Global Private Market Fundraising Report, the global private credit industry has expanded from a $280bn industry in 2007 to $1.5tn in 20222. Furthermore, in its Future of Alternatives 2028 Report, Preqin estimates that the industry will almost double by 2028 to reach approximately $3tn. While much of the growth has come from the US market, changes to the Alternative Investment Fund Manager Directive II (aka AIFMD II) promotes non-bank loan origination which has led to more market participants. However, this is just one part of the evolution that has attracted global investor interest, including in the APAC region.3

      The other part of the story is the shift in strategy and behaviour of fund managers, particularly in challenging situations. There has been less emphasis on “taking the keys” and more focus on working with borrowers and thereby holding the assets for a long period of time. This shift further aligns the private credit asset class with the Evergreen fund.

      Applying the Evergreen structure to private funds

      Taking the example of a Private Equity fund: by pooling investments, Evergreen funds can invest in a variety of private companies, thereby offering diversification for investors. Extending this concept, the Private Credit fund can be replicated within an Evergreen structure. Instead of acquiring stakes in companies, the Private Credit fund provides financing directly to companies and receives regular interest payments in return. This is an important consideration as the revenue earned from interest within a high-rate environment, along with maturities, refinancings and sales, enable managers to reinvest into new private credit opportunities on an ongoing basis.

      Benefits of a private credit Evergreen fund structure

      More flexibility and greater liquidity

      The Evergreen fund is a flexible investment vehicle with the structure underpinned by lower minimum subscriptions (circa $25k versus $5m for closed-ended) and greater liquidity4 for investors. This is because Evergreen funds continually add capital (with no lock up), resulting in a wider pool of investors subscribing to the fund. This also provides managers with greater scope and ease to rebalance asset portfolios.

      With the growth of the private credit market in the U.S. and the EU, more participants are gravitating to the space. Speed, therefore, is crucial when closing deals. Evergreen funds offer a more flexible liquidity profile, where capital is readily available and can be deployed immediately. This gives managers comfort to close deals more opportunistically. By offering perpetuity-like investment opportunities or early withdrawals to LP’s, access to the asset class is offered to investors seeking more liquidity. In 2023, elevated rates and associated borrowing costs side-lined many investors as liquidity became their primary concern. The Evergreen structure may help alleviate this risk.

      Less set-up fees and no closing period

      The perennial deal flow cycle, as mentioned above, results in the need for the open-ended fund structure. The alternative is to have a closed-ended structure that winds-down or harvests after 5-7 years. During the harvesting period, a new fund will launch, often replicating the same private credit strategy as the legacy fund and targeting the same investor pool. The Evergreen structure can save fund managers additional costs in terms of setting up further funds. In addition, as many managers faced funds closures during times of distress (in the aftermath of the Global Pandemic), challenging positions needed to be sold (or more creative solutions deployed) to return capital to investors. The Evergreen structure helps alleviate this liquidation as investors are protected by the flexibility of timing regardless of credit-cycle stage.

      Is the future Evergreen?

      Overall, private credit is well-suited for the Evergreen fund, especially within the more evolved private credit market. While the Evergreen structure provides many benefits, particularly in terms of liquidity, traditional private credit funds continue to offer investors closed-ended structures. Through our experience working with credit fund managers worldwide, we have seen considerable flexibility from fund managers offering bespoke closed-ended structures in parallel with Evergreen structures to meet investor demand or requirements throughout the credit cycle. The market can comfortably accommodate both structures and ultimately provide investors with greater choice.

      How Waystone can help

      Waystone has extensive experience across the global private credit industry and assists fund managers seeking to launch Irish or Luxembourg structures, both closed-end or Evergreen. As part of our private credit insights series, we will be sharing articles and research to assist fund managers and industry participants to navigate complexity in the global private credit market. Upcoming pieces include:

      • the operational challenges and solutions for administering of Evergreen private credit funds in North America
      • the specific challenges and solutions for European Evergreen private credit funds including AIF oversight, administration, valuation, and depositary considerations.

      If you have any questions or would like to sign-up to receive our communications, please contact your usual Waystone representative directly or reach us via the below.

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      1 The U.S. Federal Reserve (The Fed) indicates pick up range is typically between 200bps and 400bps relative to comparable asset classes, depending on seniority.
      2 The U.S. Federal Reserve estimates that as of February 2024, the figure is $1.7tn versus the high yield bond market of $1.3bn.
      3 For example, Marketsmedia reported that Goldman Sachs and Mubadala IC (as a co-investment strategy) have a $1bn account to invest within private credit in the region with a specific focus on India.
      4 Increased liquidity is crucial for investors, especially as volatility increases or with a shift to a risk-off environment.
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