Evergreen Funds vs. Closed-End: Why 47% of Investors Prefer Hybrid Structures

The traditional closed-end fund structure—commit capital for 10+ years with zero liquidity until exit—faces growing pressure from investors demanding flexibility. The 2025 Preqin Investor Outlook reveals that 47% of institutional investors now prefer hybrid fund structures offering periodic liquidity windows over purely closed-end vehicles. This shift reflects broader changes in capital markets: investors want alternatives exposure without the decade-long lockup that traditionally came with it.

Evergreen funds, continuation vehicles, and hybrid structures respond to this liquidity demand while maintaining the operational advantages of long-term capital. Understanding these evolving structures is critical for managers fundraising in 2025—LPs increasingly evaluate fund structure as carefully as investment strategy when making allocation decisions.

Traditional Closed-End Funds: Benefits & Limitations

Closed-end funds lock capital for the fund's life—typically 10 years with 2-3 year extensions possible. LPs commit capital at fund inception, the GP calls capital as needed for investments, and distributions occur only when portfolio companies exit or generate cash flow. No LP redemptions are permitted until the fund liquidates, providing GPs with stable, long-term capital for value creation strategies.

This structure offers significant GP advantages. Capital stability allows patient value creation strategies—buy a company, implement operational improvements over 5-7 years, exit when timing is optimal rather than when redemptions force liquidation. No forced selling means GPs never liquidate portfolio companies at unfavorable valuations to meet LP redemption requests. Long-term alignment keeps GPs and LPs focused on fundamental value creation rather than mark-to-market volatility.

However, LP liquidity constraints create fundraising challenges. The 10-year capital lockup limits LP participation—smaller institutions and family offices often can't commit to decade-long illiquidity. Private secondary markets provide some liquidity but require LPs to accept significant discounts (15-30% below NAV) to exit positions. Inheritance and organizational changes create forced selling pressure when key decision-makers change but capital remains locked. These liquidity constraints make closed-end structures less attractive to the growing universe of investors who want alternative exposure with some flexibility.

Evergreen Funds: Permanent Capital with Periodic Liquidity

Evergreen funds operate with permanent capital and periodic liquidity windows—typically quarterly or semi-annual redemption opportunities. Unlike closed-end funds with fixed liquidation dates, evergreen funds continue indefinitely as long as investors remain and the GP continues operating. LPs can enter at any time (subject to minimums and GP approval) and exit during scheduled redemption windows, subject to liquidity gates and holding periods.

The structure provides investors with meaningful advantages. Flexible entry and exit allow capital allocation adjustments based on portfolio needs or changing views on the asset class. Lower commitment hurdles make these funds accessible to smaller institutions—commit $500K rather than $5M, test the strategy, and add capital later if performance warrants. More frequent NAV updates (quarterly versus annual) provide better portfolio visibility for LPs managing multiple managers.

GPs benefit from flexible fundraising capacity—accept new capital at any time rather than during discrete fundraising windows. Portfolio construction flexibility allows deploying capital as opportunities arise instead of forced deployment pressure from fixed-term fund capital calls. The stability of permanent capital (subject to redemption limits) enables long-term strategies while quarterly valuations provide market discipline.

However, redemption risk represents the primary challenge. Liquidity gates typically limit quarterly redemptions to 5-10% of NAV to prevent run-on-the-fund scenarios. Gates protect remaining LPs but frustrate redeeming LPs who can't exit when desired. Market volatility triggers redemption waves—when markets decline, multiple LPs may attempt to redeem simultaneously, hitting liquidity limits. Managing cash drag (holding 5-10% of fund in cash to meet redemptions) reduces returns versus fully invested closed-end funds.

Hybrid Structures: The Best of Both Models

Hybrid structures combine closed-end stability with periodic liquidity, attempting to balance GP operational needs and LP flexibility demands. Common hybrid approaches include closed-end funds with scheduled tender offers (annual liquidity windows at GP discretion), continuation vehicles allowing LP exits at year 5-7 while fund continues, and core-plus structures where core holdings are permanent but opportunistic investments have defined exits.

These structures deliver compromise benefits for both parties. GPs retain capital stability for long-term value creation while providing controlled liquidity events that don't force portfolio liquidation. LPs get periodic liquidity options without private secondary market discounts—exit at NAV (or close to it) during tender windows rather than accepting 20-30% discounts in private secondary markets. The approach reduces re-fundraising pressure—rather than raising a new fund every 3-4 years, existing LPs can add capital while others reduce exposure.

Continuation vehicles particularly address the liquidity mismatch. At year 6 or 7 of a traditional 10-year fund, the GP offers LPs two options: exit at current NAV or roll positions into a continuation vehicle. Exiting LPs receive cash (funded by new LPs entering the continuation vehicle), while continuing LPs maintain exposure to the remaining portfolio. The GP extends the hold period for assets not ready for exit without forcing LPs into extended lockups they didn't originally commit to.

What 47% Investor Preference Means for Fund Structures

The 47% institutional investor preference for hybrid structures (versus 31% for pure closed-end and 22% for pure evergreen) reflects changing LP priorities in 2025. This data from Preqin's Investor Outlook signals significant implications for fund managers designing new vehicles.

Liquidity has become a competitive differentiator in fundraising. Two managers with similar strategies and track records compete for an LP allocation; the one offering periodic liquidity windows has an edge. LPs overweight in alternatives (above target allocation) can't rebalance without liquidity options—they're stuck or forced to sell in unfavorable private secondary markets. The managers providing controlled liquidity windows help LPs manage allocation constraints without forcing unfavorable secondary sales.

Hybrid structures enable relationship building across market cycles. LPs can test a new manager with modest initial commitment, add capital after observing performance, and potentially reduce exposure during liquidity windows if dissatisfied. This "try before you buy" approach particularly appeals to LPs evaluating emerging managers without established track records. The ongoing relationship opportunity (versus one-shot closed-end commitment) builds deeper LP relationships over time.

The structures also address generational wealth transition challenges. Family offices and endowments face board turnover, investment committee changes, and beneficiary shifts over 10+ year periods. Hybrid structures allow capital allocation adjustments as decision-makers and strategies evolve—the new CIO can reduce exposure to strategies they're less comfortable with during scheduled liquidity windows rather than being locked into predecessor's decisions for years.

Implementing Hybrid Structures: Operational Considerations

Tender offer mechanics require careful design to balance LP liquidity and portfolio protection. Determine tender frequency (annual, semi-annual, quarterly) based on portfolio liquidity—real estate funds need less frequent windows than PE funds with more liquid holdings. Set tender limits (5-20% of NAV per period) that provide meaningful liquidity without forcing asset sales. Establish pricing mechanisms (NAV, NAV minus discount, third-party valuation) that ensure exiting LPs don't extract value from remaining LPs. Design holdback provisions where tender proceeds pay out over 6-12 months to allow for final valuation adjustments.

Gate provisions protect remaining LPs from first-mover advantages during market stress. Pro-rata gates ensure all redemption requests are treated equally—if requests total 20% of NAV but the tender limit is 10%, all requests are filled at 50% (pro-rata allocation). GP discretion clauses allow suspending tenders during market dislocations when fulfilling redemptions would force disadvantageous asset sales. Holdback provisions retain portion of tender proceeds until final period valuations confirm no value extraction occurred.

New investor onboarding into ongoing funds requires careful structuring. Price new capital at current NAV (based on recent valuations) to ensure fair entry point relative to existing LPs. True-up mechanisms adjust for valuations that change between commitment and funding. Equalization payments compensate existing LPs if new capital enters at stale valuations that don't reflect subsequent value creation. These provisions prevent new LPs from free-riding on existing LPs' capital and GP's previous value creation.

Communication and expectations management becomes critical for hybrid structures. Clearly explain tender mechanics in offering documents—frequency, limits, pricing, GP discretion. Set realistic LP expectations that tenders are not guaranteed redemption rights but discretionary liquidity provided when feasible. Communicate tender results transparently when requests exceed limits—explain the pro-ration methodology and alternative liquidity options. Maintain consistent NAV methodologies so LPs can assess tender pricing fairness.

Implementing Hybrid Structures Successfully

Successful hybrid fund structures typically share common characteristics: annual or semi-annual tender windows providing meaningful liquidity without forcing asset sales, tender limits of 10-20% of NAV per period balancing LP access with portfolio protection, pro-rata allocation when requests exceed limits ensuring fair treatment, and clear GP discretion to suspend tenders during market stress protecting remaining investors. Fund managers report that properly designed hybrid structures maintain LP satisfaction scores above 90% while providing flexibility that strengthens fundraising for subsequent vehicles.

Continuation vehicles offer another proven approach to addressing LP liquidity needs. As funds approach the end of their term with remaining unrealized assets, offering LPs the choice to exit at current NAV or roll into an extended vehicle satisfies diverse investor preferences. Typically 30-50% of LPs choose to exit (often institutions hitting allocation limits), while others roll forward appreciating the extended hold period. New capital from incoming LPs funds the exits, allowing GPs to retain top-performing assets for optimal exit timing while providing liquidity to those needing capital back.

How Polibit Supports Flexible Fund Structures

Automated NAV Calculations for Ongoing Funds: Polibit calculates and updates net asset value automatically for evergreen and hybrid structures. The platform tracks investor capital contributions, distributions, and share of fund performance to determine current position values. When tender offers occur, the system calculates redemption amounts based on current NAV and applicable discounts automatically—eliminating manual spreadsheet calculations and potential errors.

Tender Offer Management: Built-in workflows manage tender offer processes from announcement through execution. The platform communicates tender windows to LPs, collects redemption requests, applies pro-ration if requests exceed limits, calculates final redemption amounts, and initiates payments. Complete audit trails document tender decisions and pricing calculations for LP transparency and regulatory compliance.

New Investor Onboarding at Current NAV: When new LPs join ongoing funds, Polibit prices their investment at current NAV based on latest valuations. The system tracks the vintage of each LP's capital (when they invested and at what NAV) to ensure accurate performance attribution and carry calculations. Equalization mechanisms adjust for material NAV changes between commitment and funding.

Multi-Share Class Support: For funds offering different liquidity terms to different investor types, Polibit supports multiple share classes with distinct redemption rights, fee structures, and return waterfalls. Institutional LPs might receive quarterly liquidity at NAV while retail LPs access semi-annual liquidity at NAV minus 2%—the platform tracks and manages these differences automatically.

Continuation Vehicle Structuring: When creating continuation vehicles, Polibit facilitates LP elections (exit versus roll), calculates exit payments based on current valuations, and sets up the new vehicle structure with continuing LPs plus new capital. The historical performance tracking continues seamlessly from the original fund through the continuation vehicle for accurate return reporting.

Key Takeaways

Survey your LP base to understand liquidity preferences before designing your next fund. Do they value the permanent capital stability of closed-end structures, or do they need periodic liquidity options? The 47% institutional preference for hybrid structures suggests many LPs want some middle ground—long-term capital with escape valves.

Consider hybrid structures as competitive differentiator when fundraising against established managers. A first-time manager with a pure closed-end structure competes at a disadvantage against established managers offering the same strategy with liquidity windows. Adding annual tender offers or planned continuation vehicles can level the fundraising playing field by addressing LP liquidity concerns.

Design liquidity mechanics that protect portfolio integrity while providing meaningful LP optionality. Gates that are too restrictive (2% annual tender limits) provide no real liquidity and frustrate LPs. Gates that are too loose (50% quarterly redemptions) force constant portfolio disruption and asset sales at inopportune times. The sweet spot typically ranges from 10-20% annually depending on portfolio liquidity.

Communicate tender mechanics clearly in fund documents and reinforce in LP communications. Many LP complaints about hybrid structures stem from misunderstood expectations—they thought tender offers were guaranteed redemption rights rather than GP-discretionary liquidity windows. Crystal-clear documentation and consistent communication prevent these misunderstandings.

Finally, infrastructure supporting hybrid structures is no longer optional for managers considering these approaches. Manual NAV calculations, tender offer administration, and new investor onboarding become unmanageable at scale without purpose-built platforms. Choose fund administration infrastructure that supports multiple fund structures rather than being locked to closed-end models.