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Big private equity managers that have hoovered up cash from wealthy investors risk inflicting reputational damage on the rest of the industry, the head of alternative investments at asset manager Neuberger Berman has warned.
The private capital sector is increasingly chasing money from individuals as the amount of money available from its institutional backers such as pension funds has slowed.
Alternative asset managers including Blackstone and KKR have raised billions of dollars in recent years from wealthy individuals in so-called semi-liquid or evergreen funds.
“There will be some bad stories which will reflect poorly on the entire industry,” said Tony Tutrone of the private New York firm, which has more than $500bn in assets under management.
There are concerns that because of the way asset managers’ fees are structured, they may be incentivised to accept more money into their evergreen funds — which are not capped in the same way as closed-ended funds — than they can effectively deploy.
“Managers need to be disciplined and not take money if they’re getting too much money and they don’t have enough deal flow” to put that cash to work, he said.
Unlike in traditional closed-ended private market 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.
Managers needed to limit the amount of cash they took in to avoid them “lowering the bar” on the quality of deals, he added.
That could sometimes clash with the demand from shareholders in publicly listed private markets firms for them to gather assets under management (AUM) on which they could generate reliable management fees, which are valued more highly than unpredictable performance-based fees.
“One of the conflicts in my mind, especially for some of the publicly traded private equity firms, is that they serve also their stockholders and their stockholders want AUM growth,” Tutrone said.
Evergreen funds have soared in popularity as regulatory changes have made them more attractive to a broader range of investors.
More than €88bn had been invested in evergreen funds by June this year in Europe alone, over double the amount in early 2024, according to consultancy firm Novantigo.
With between $2tn and $4tn potentially flowing into private markets in the next five years, Tutrone predicted, the need for discipline was acute. “We’re talking about a lot of money,” he said.
He said the conflicts at large listed managers could be managed and that Neuberger would still invest in their closed-ended funds, where a manager had provided evidence of having managed conflicts well in the past.
Tutrone said the evergreen structures offered benefits to consumers, such as access to growth taking place in expanding private markets and the chance to put their capital to work straight away.
Neuberger manages more than $15bn its own private markets evergreen vehicles and on Tuesday announced it would partner with Aviva to offer private asset investments to UK defined contribution retirement savers.