Evergreen secondary funds purchase existing private equity investments from institutions seeking liquidity, often at discounts to the positions' most recently reported net asset values. The sales typically come from pension funds or endowments rebalancing portfolios for reasons unrelated to performance. When a buyer acquires those assets, it captures the benefit of purchasing quality investments below their stated value.

A hypothetical $250 million evergreen fund that raises $100 million in new capital over four months and deploys it into secondary positions at a 20% discount controls roughly $125 million in underlying assets. That creates $25 million of immediate value for the fund before any change in the performance or valuation of the underlying companies. A $100,000 investment would be worth $107,140 in four months under that scenario.

The earliest investors in a new evergreen secondary fund may capture a disproportionate share of the initial net asset value lift while the fund remains relatively small. Inside a $3 billion fund, the identical transaction produces a far smaller effect. The same $100,000 investment would be worth $100,800.

Firms including HarbourVest, Ardian, Hamilton Lane and Coller Capital have launched evergreen secondary-oriented vehicles that have reported strong early results. Those gains have been helped in part by buying seasoned assets at a discount.

Morningstar has argued these funds' early returns are driven more by the pace of incoming cash than by actual investment performance. But the net asset value itself comes from the original manager's own audited books. The seller agreed to the discount with full knowledge of what the position was worth, and the buyer does not mark anything up beyond what an independent auditor had already certified.

The structure sidesteps the J-curve that affects first-time private equity investors. A new drawdown fund invests a blind pool of capital over several years, and 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, with no blind pool and no multi-year wait.

Advisors conducting due diligence should ask how large the fund is today relative to its launch size, since that determines whether the early net asset value lift has already played out. They should also ask whether the fund invests across multiple managers and vintages or concentrates in a single manager's fund, since a multi-manager secondaries fund spreads risk in a way a single commitment cannot.

At the end of a traditional drawdown fund's life, a manager who cannot unwind the last 10% of a portfolio may sell it to a tail-end buyer at a steep discount. In a single-vintage fund, that loss lands on every investor still in it. 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 pool of assets.