Evergreen funds are vehicles without a fixed lifetime that are continuously open to capital inflow and that at the same offer liquidity to requesting investors.
Across Europe, there is a growing push to channel more capital into alternative assets. From an investment perspective, this is about boosting Europe’s competitiveness. From an investor perspective, it is about adapting to demographic change and strengthening third-pillar pension schemes. ELTIF 2.0 is the latest illustration of policymakers' ambitions in this area.
The Luxembourg advantage in structuring evergreen funds
Fund sponsors turn to evergreen vehicles to bridge the gap between portfolio illiquidity and the liquidity expectations of not only some institutional investors but also private wealth and retail-adjacent investors. Luxembourg, with assets under management exceeding €8.2 trillion and alternatives representing ± 35% of that, is at the centre of this trend.
What makes Luxembourg particularly compelling in this space is its funds toolbox. Its range of regulated and lightly regulated vehicles, spanning multiple legal forms and investor eligibility regimes, allows promoters to tailor liquidity terms, redemption mechanics and governance frameworks to the specific risk and return profile of the underlying strategy. In our experience, few jurisdictions offer comparable flexibility within a single, well-established regulatory ecosystem. The breadth of the Luxembourg funds toolbox has broadened investor access – including through evergreen funds – to private equity, real estate, infrastructure and private credit.
Liquidity challenges are real, but not new
None of this means the product is without its challenges. Quite some of these funds hit the press recently as the funds needed to actively limit the liquidity and temporarily block off the investor exit – it highlights the inherent tension: when markets are under pressure, as the current Middle East conflict and the related energy price volatility are revealing, portfolio illiquidity and investor redemption rights collide as investors find themselves unable to exit whilst managers can be left scrambling to manage cash flows.
Let us be clear: these concerns are legitimate. For those of us who have advised on fund structures through multiple market cycles, including the wave of open-ended real estate fund suspensions during 2008, the current challenges are not all unfamiliar. Liquidity stress in open-ended vehicles investing in less liquid assets is a known risk, and one that can, at least to some extent, be managed with appropriate structuring and governance.
Getting the architecture right: governance as the differentiator
It is key to getting the architecture right from the outset. A well-structured evergreen fund will incorporate carefully calibrated liquidity management tools (or LMTs) that are proportionate to the liquidity profile of the underlying portfolio whilst managing investor expectations. Equally important is a robust valuation framework and appropriate frequency of NAV calculations. Transparent investor disclosure, setting realistic expectations around redemption timelines, is not merely a regulatory obligation but a commercial imperative. It also ensures that the cost of liquidity would rather be borne by exiting investors and not by those remaining in the fund.
The concept is not inherently flawed, the challenge lies in structuring it transparently and managing it responsibly.
Luxembourg’s regulatory and structuring toolkit is particularly well suited to this task. The recent transposition of AIFMD II harmonises liquidity management tools across Europe, though for well-advised evergreen fund managers, it largely formalises what sound practice already required: the systematic integration of liquidity management into fund governance.
The CSSF’s supervisory framework, combined with Luxembourg’s depth of structuring expertise, provides a strong foundation for high-quality evergreen products. As experienced funds lawyers we play a critical role in ensuring these tools are properly calibrated and that structures balance investor access with prudent liquidity management.
So where does this leave us? The outlook for evergreen funds remains positive, provided the industry learns from recent experiences. The new AIFMD II framework, far from being a constraint, should be seen as an opportunity: managers who proactively embed robust LMT frameworks will gain a competitive edge in a market where investors increasingly expect robust liquidity governance as a baseline requirement. The demand from investors for access to private markets is structural and won’t disappear; what will distinguish successful products is the rigour and transparency with which they are designed and operated.
Evergreen funds are not a passing trend, they are a structural feature of the modern investment landscape, and Luxembourg is ideally positioned to lead.
Evergreen funds are not going away. The next generation of these products will be defined not only by the appeal of their asset class, but by the quality of their governance.