Evergreen Secondary Funds Favor Early Investors, Advisor Says

Morningstar has argued that such funds' early returns are driven more by the pace of incoming cash than by actual investment performance. Grossman pushed back on that interpretation. The NAV itself, he said, comes from the original manager's own audited books. The seller agreed to the discount with full knowledge of the position's value. The buyer is not marking anything up beyond what an independent auditor had already certified.

The structure also avoids the J-curve that hurts first-time private equity investors, Grossman said. A traditional drawdown fund invests a blind pool of capital over several years; clients typically do not see a positive return until year three or four. An evergreen secondaries fund buys into a portfolio that is already six to eight years seasoned. There is no blind pool and no multi-year wait. Grossman called it a natural way for a client who has never owned private equity before to build confidence to explore other alternatives later.

Grossman advised advisors not to focus on headline return numbers. Instead, ask how large the fund is today relative to its launch size. That determines whether the early NAV lift has already played out. Ask whether the fund invests across multiple managers and vintages or concentrates in a single manager's fund. A multi-manager secondaries fund spreads risk in a way a single commitment cannot, he said.

The strongest argument for the evergreen structure, Grossman said, appears at the other end of a traditional drawdown fund's life. When a manager cannot unwind the last 10% of a portfolio and must sell it to a tail-end buyer at a steep discount because no other exit exists, the loss lands on every investor still in the vintage fund. In an evergreen fund that has grown to several times its original size, the same forced sale becomes a potential rounding error, spread across a much larger asset pool.

The preference for liquidity is legitimate on its own, Grossman said. Sometimes the greatest advantage is simply getting there first.