The headline IRR at which a closed-ended fund merely ties an evergreen
A drawdown fund advertising 13.25 per cent does not beat an evergreen netting 8.64. It ties with it — because four fifths of the apparent advantage is a measurement choice.
Set an evergreen fund netting 8.64% beside a closed-ended
fund advertising 16.99% and the choice looks obvious. It is not. On the
measure the investor actually lives, the gap is 1.78 points, not
8.35 — and a drawdown fund needs to advertise only
13.25% to draw level.
First, what the evergreen gives up
An evergreen fund offers redemption, and redemption has to be funded. A liquidity sleeve of
20% in short-dated paper is the ordinary answer.
Weight
Return
Private portfolio
80%
12.40%
Liquidity sleeve
20%
4.20%
Blended, before any fee
100%
10.76%
The sleeve is what makes monthly redemption possible. It is also the largest single cost in the structure, and it appears on no fee schedule.
The sleeve costs 164 basis points a year of gross
return — 1.31 times the institutional management fee. It is the
largest charge in the structure and nobody collects it. It is the price of the redemption option,
paid whether or not the option is used.
Then the fee load, which is not one number
Institutional
Retail
Blended gross return
10.76%
10.76%
Management fee
1.25%
1.75%
Operating costs
0.35%
0.35%
Distribution fee
—
0.75%
Performance fee
0.52%
0.36%
Net to the investor
8.64%
7.55%
Gap
109.4 bp
Note the performance fee: the retail class pays a smaller one, because after its heavier base load it earned less above the hurdle.
The two share classes are 109 basis points apart, on the same portfolio.
Any comparison that quotes “the evergreen” without saying which class is comparing
something to nothing.
The comparison as it is usually made
Year
Called
Distributed
0
20
0
1
25
0
2
25
0
3
20
0
4
10
15
5
0
26
6
0
42
7
0
48
8
0
44
9
0
34
10
0
21
Total
100
230
A commitment of 100. TVPI 2.30×, and an IRR on called capital of 16.99%.
Called 100, distributed 230, 2.30× the money, an IRR of
16.99%. That is the tear sheet, and it is arithmetically correct.
The comparison as the investor lives it
The investor did not commit 100 at the start and get it back. They committed
100 and had to hold it available against calls that arrived over four years. The uncalled
balance sat in the same short-dated paper the evergreen sleeve holds, earning 4.20%. That is not
a criticism of the fund — it is what a commitment is.
Measure
Closed-ended
Evergreen
Gap
Headline rate (called capital)
16.99%
8.64%
+8.35 pts
Rate on committed capital
10.42%
8.64%
+1.78 pts
The investor commits 100 and must hold it against the calls. The uncalled balance earns the cash rate, not the fund’s.
Terminal wealth on the whole commitment is 269.45, an annual
rate of 10.42%. Set against the evergreen’s 8.64%, the honest gap
is 1.78 points. 78.7% of the apparent advantage was never there —
it was the difference between measuring the money that was called and measuring the money that was
tied up.
The point of indifference
Hold the call schedule and the shape of the distributions fixed and scale the outcome. The
drawdown fund draws level with the evergreen at a multiple of
1.94× — terminal wealth 229.03 against 229.03 —
and at that multiple its tear sheet reads 13.25%.
So the practical rule is this: a closed-ended fund quoting anything below about
13.3% is, on this call schedule and against this evergreen, the worse of the two —
whatever the 8.3-point headline suggests.
Two more places the numbers mislead
The public market equivalent inherits the same flaw
Public market equivalent
Value
On called capital — the conventional measure
1.45×
On committed capital
1.14×
The evergreen fund
0.97×
Overstatement of the conventional measure
0.31 turns
Index at 9% a year. Above one means the fund beat a passive alternative; the evergreen, net of everything, did not.
The conventional PME compounds only called capital, so it carries the same omission as the
headline IRR and overstates by 0.31 turns. On committed capital the
drawdown fund returns 1.14× the index; the evergreen, 0.97×
— below one.
And the volatility is an artefact of appraisal
An evergreen reports a standard deviation of 6.5%, computed from quarterly appraised
values. Appraisals are autocorrelated — here at 0.45 — which smooths the series.
Unsmoothing multiplies it by 1.9938, giving 12.96%:
twice the reported figure.
The Sharpe ratio falls from 0.683 to 0.343 — by exactly the
unsmoothing factor, which it must, since the numerator does not move. A low reported volatility is
the redemption option's second advertisement, and it is measurement, not risk.
One last figure for scale. If appraised values run 6% above eventual realisations, that
optimism costs 67 basis points a year — 41% of the sleeve
drag, and more than the operating costs of the institutional class.
What to do with this
Ask for the rate on committed capital before the rate on called capital. Any manager can produce
it; the schedule is in their own reporting. The difference between the two is not a rounding
error — here it is 6.57 points of annual return.
And when comparing an evergreen with a drawdown fund, hold the cash rate the same on both sides.
The uncalled balance and the liquidity sleeve are the same asset doing the same job; letting one of
them earn the fund's return and the other earn cash is how an eight-point gap becomes a two-point
one, or the reverse.
The workbook behind this article
Every figure above is a live formula in the companion file for
The Evergreen Fund Handbook. Change the sleeve weight, the call
schedule or the fee load and the point of indifference moves on its own. It is free, and it
needs no account and no email address.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.
If this book helped — or didn’t — a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.