Venture capital (VC) and private equity (PE) funds are traditionally structured with limited partnerships and fixed time horizons. These closed-ended funds feature a defined lifespan, typically around ten years, after which the fund’s capital is utilized, proceeds are distributed, and the fund dissolves. However, an alternative and less common model known as an open-ended—or evergreen—fund offers a perpetual structure with unique benefits and challenges.
In this article, we explore the nuances of evergreen funds through the lens of a successful VC investor, Rodrigo Sanchez Servitje, a General Partner at B37 Ventures. Having raised and operated an evergreen fund, Rodrigo shares his insights and experiences, shedding light on this lesser-understood investment vehicle.
What Are Open-ended and Evergreen Funds?
Closed-ended funds have long been the default structure in VC, maintaining a “if it’s not broken, don’t fix it” tradition. These funds raise a fixed amount of capital to be invested over a set period, then liquidated at the end of the fund’s life. Despite the dynamic, innovation-driven industries venture capital focuses on, the underlying fund structure has remained largely consistent.
An open-ended fund, by contrast, operates indefinitely. Capital is invested directly into an entity, often structured as an LLC, without a termination date. Investors purchase units of the fund, which may offer a preferred yield (or hurdle rate) and the option to invest further or exit at their discretion. These structures, often referred to as permanent capital vehicles or evergreen funds, differ slightly in mechanics. For instance:
- Evergreen funds can recycle returned capital.
- Open-ended funds like B37 Ventures distribute returns directly to investors.
The flexibility of these structures represents an alternative approach to venture investing, allowing for nuanced stakeholder alignment.
Benefits of Open-ended Funds
Open-ended funds offer multiple advantages to investors, fund managers, and portfolio companies:
- Alignment:
These funds eliminate the pressure of rigid timelines, allowing managers to make long-term investment decisions. Additionally, they attract entrepreneurs seeking sustainable growth rather than hasty exits. - Simplicity:
Investors can view these funds as streamlined vehicles without layers of complexities associated with multiple interconnected partnerships or staggered funds. - Flexibility:
Managers benefit from the ability to adjust investment theses or accommodate alternative opportunities that may not fit within a stricter closed-ended structure. - Transparency:
A single fund entity ensures clarity in terms of budgeting, reporting, and management fees.
For B37 Ventures, alignment between its stakeholders was key. Rodrigo explains, “Our investors, typically large corporations, prioritize strategic returns over purely financial ones. Likewise, our portfolio companies value partnerships with these corporates, which can generate significant commercial opportunities.” B37’s evergreen model enables the firm to maintain these relationships consistently while aligning incentives around long-term success.
Challenges of Open-ended Funds
Despite their compelling benefits, open-ended funds are not without drawbacks:
- Illiquidity:
While open-ended structures promise flexibility, the illiquid nature of early-stage startups limits immediate returns for investors. - Irregular Cash Flows:
Big exits result in unpredictable, variable distributions that create cash flow inconsistencies. - Valuation Complexity:
Maintaining transparent and consistent valuation metrics (Net Asset Value or NAV) is crucial but challenging. - Market Perception:
Startups and co-investors may lack familiarity with the open-ended model, potentially causing hesitation or confusion.
Rodrigo addresses these concerns from the portfolio perspective: “Rather than focusing on how our fund operates, we showcase successful outcomes—highlighting measurable value we’ve provided by connecting portfolio companies with strategic commercial opportunities. Results speak louder than fund structures.”
How Common Are Evergreen VC Funds?
Evergreen VC funds remain a niche model. According to PitchBook, only 200 such funds exist globally, with nearly half established in the past 20 years. By comparison, there are over 10,000 VC funds worldwide.
This discrepancy highlights the novelty of evergreen funds in the broader venture market, with most existing in the U.S. and U.K.—regions known for their developed capital markets and entrepreneurial ecosystems. Evergreen funds are also popular in specific sectors, like life sciences, where long development timelines align well with the indefinite nature of these funds.
While still uncommon, evergreen structures may be more prevalent than reported, as angels, family offices, and corporate VC units often adopt these models without public disclosure.
How Do Evergreen Funds Perform?
When comparing evergreen funds’ performance to traditional VC funds, overall results (as measured by Total Value to Paid-In, or TVPI) are similar. However, the components of return tell a different story:
- DPI (Distributed to Paid-In): Evergreen funds have lower DPI, reflecting limited immediate payouts to investors.
- RVPI (Residual Value to Paid-In): Evergreen funds generally demonstrate higher RVPI, reflecting strong valuations for retained assets, aligning with their longer-term approach.
This split validates the evergreen model’s emphasis on value creation over extended time horizons, albeit at the cost of near-term liquidity.
Mechanics of Operating an Open-ended Fund
Operating and raising an evergreen fund requires thoughtful planning and unique considerations compared to a traditional fund setup.
Compelling Reasons to Choose an Evergreen Structure
An evergreen fund is not just a creative variation of a closed-ended fund. It must be aligned with the manager’s investment thesis, long-term goals, and the needs of stakeholders. Potential reasons for adopting an evergreen structure include:
- A belief in long-term portfolio value that transcends individual fund lifecycles.
- A desire to create intergenerational investing vehicles with enduring operational presence.
- Operating in market contexts (e.g., emerging markets) with delayed or unpredictable exit opportunities.
B37 Ventures, for instance, chose the model to align with its dual focus on startups and corporate investors. Rodrigo notes, “We think of our fund as a platform where we match startups needing scale with corporations craving innovation. The structure complements this mission by fostering ongoing collaboration.”
Fundraising Tips
For seasoned managers transitioning to an open-ended model, clear communication is key. First-time GPs face the additional challenge of establishing credibility while demonstrating how their structure aligns with investors’ priorities. Corporates or family offices, for example, prefer stable, long-term capital commitments with reasonable yield expectations.
Day-to-Day Operations
Day-to-day operations differ minimally from traditional funds, though certain aspects require adjustment:
- Budgeting: Unlike traditional funds that charge management fees as a percentage of AUM, evergreen funds pre-determine annual budgets with investors.
- Cash Flow Management: Dry powder reserves, careful timing of exits, and ongoing capital deployment must be calibrated strategically.
- Valuation and Buy-Ins: Transparent NAV reporting helps drive investor confidence and guides pricing for new entrants. Flexibility in terms, such as side-pocket investments, can address fairness when onboarding new LPs.
Rodrigo highlights investor alignment as the crux of success: “We focus on keeping our model fair for all parties. For instance, NAV pricing ensures clarity, while hurdle rates ensure investors are rewarded adequately before GPs benefit from higher profits.”
Growing Sustainably with an Evergreen Approach
Evergreen funds transcend structural limitations of closed-ended models, paving the way for intergenerational, enduring investment organizations. With steady returns and operational stability, they offer the option to look beyond profit generation and integrate diverse strategic goals.
For Rodrigo and B37 Ventures, the future is about geographic and operational expansion: “Building on our strengths, we aim to expand our network globally by collaborating with more corporates in Europe and the Middle East. Extending our connections strengthens the platform effect for all stakeholders involved.”
While not without challenges, evergreen funds represent a viable alternative for investors and managers seeking long-lasting impact. They are especially relevant for niche applications where flexibility, alignment, and long-term value outweigh fast payouts. As this space continues to mature, evergreen funds may become a more prominent feature of the venture capital landscape.