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An influential group representing some of the private equity industry’s largest backers has sounded the alarm about the risks to institutional investors from a rush of retail money into the sector.
The number of deals needed to deploy wealthy individuals’ cash could pull managers’ attention away from investing the capital of pension plans and endowments, the Institutional Limited Partners Association warned.
Fees on offer from evergreen funds, a newly popular type of vehicle suited to retail investors, could encourage buyout firms to prioritise them instead of the traditional funds backed by institutions, ILPA said in a new report.
Billions of dollars are flowing into evergreen funds, and institutional investors have expressed fears privately that this influx of new cash could undermine their standing as the sector’s top clients.
The flood of retail money could “fundamentally alter the landscape of private equity”, said Neal Prunier, managing director of industry affairs at ILPA.
He added that while private equity had historically “outperformed” other asset classes, institutional investors were concerned that “might not continue to the same degree given the types . . . and the volume of investments that are needed to satisfy the retail capital space”.
Evergreen vehicles have no end date and allow investors to redeem their money at regular intervals, while institutions largely lock their capital into closed-end funds for about a decade.
By June, more than €88bn had been invested in evergreen funds in Europe alone, over double the amount in early 2024, according to consultants Novantigo.
ILPA warned that where a private equity group had both a retail vehicle and an institutional fund, those interests might not align and the institutional investors could be the ones to lose out.
“Investment decisions related to individual deals . . . may be influenced by the needs of the retail vehicle, which may conflict with the interests of the institutional fund,” ILPA said.
This was because evergreen vehicles tend to have different incentive structures, the report said, such as paying performance fees based on the total value of holdings rather than on realised investments as in closed-end funds.
Unlike in traditional funds, which take commitments and call cash when a deal arises, evergreen funds take cash on day one and must deploy it quickly to avoid hurting returns.
ILPA, which counts many large Canadian and US pension funds as well as top sovereign wealth funds as members, said the “greater deal flow” required to satisfy this need could lead to lower quality investments.
The body also suggested that “potentially unlimited” cash from evergreen vehicles for buyout firms to invest alongside traditional funds in deals could leave institutional investors with no insight as to what size or type of deal the fund would do.
ILPA added that institutions could also lose some of their opportunities to invest directly — and traditionally fee-free — in portfolio companies alongside the private equity funds they back, since buyout firms had a fee-paying source of such capital.
