
The Power of Compounding in Evergreen Solutions
Key takeaway
Evergreen solutions can offer immediate, accessible exposure to private markets’ historically higher compounded returns, providing a potential “running start” for certain investors.
Compounding returns are a powerful engine for portfolios. It’s no wonder that Albert Einstein called compound interest and its exponential growth “the eighth wonder of the world.”
Historically, private equity has demonstrated its ability to help investors access compounding’s potential. The asset class generally compounds capital efficiently because of its lower downside volatility and upside potential.
Global buyout private equity has historically generated higher compounded returns with lower downside risk compared to public equity
Annual Compound Returns*
Maximum Cumulative Negative Returns
For illustrative purposes only. Past performance is not a reliable indicator of future results. One cannot invest directly into an index. Over the past five years, global buyout private equity strategies have demonstrated higher compound annual growth rate (CAGR) with lower downside risk compared to the MSCI World Index.
*Trailing periods ending 3/31/25.
Source: MSCI and MSCI Private Capital Solutions
How compounding impacts portfolio outcomes
What does private equity’s compounding potential look like in a portfolio? To tangibly understand its impact, consider the 10.1% average annual return of the S&P 500 since 1945. If an investor can outperform that figure by even small percentages, we see return potential accumulate over time.
Outperformance of Even 2% or 4% May Create Compelling Compounding Outcomes
The Power of Compounding Over 20 Years
A comparison of total compounded returns over 20 years of a $100 investment with a 10%, 12% and 14% average annual return (AAR).
To pursue these kinds of outcomes in their own portfolio, an investor can take two approaches. They can construct and maintain a traditional drawdown program that builds and maintains exposure in a highly diversified way. Or, they can look to evergreen solutions, which provide a mechanism for investors to acquire perpetual private equity asset class exposure with a single commitment and lower operational complexity.
Drawdown and evergreen solutions are complementary, and the right mix of both will depend on an investor’s goals and preferences.
However, evergreen solutions are notable for the immediacy and flexibility with which they allow investors to access private equity and its compounding potential.
How compounding impacts portfolio outcomes
To understand evergreen solutions’ ability to compound, it’s important to understand what qualities fuel compounding.
In simple terms, to effectively compound, we believe an investor must:
- Gain exposure to the market …
- Through a diversified pool of assets …
- Stay invested across market cycles and,
- When aligned with their goals, invest regularly over time to take advantage of cost averaging.
Evergreen solutions provide immediate exposure to a diversified, mature pool of private equity assets, with an open-ended timeline and the ability to redeem on a periodic basis.
Thus, we believe the central tenants of evergreen solutions are designed to facilitate the compounding of capital, offering a “running start” for certain investors.
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Why invest in evergreen solutions?
Ultimately, evergreen solutions outsource the operational complexity of building and managing a private equity portfolio “from scratch.” With one allocation, an investor can step into a mature, highly diversified pool of private equity.
Every single day that an investor has these kinds of assets in the market fuels the potential for compounded value. So, if long-term compounded returns are a marathon, then an evergreen structure can help a portfolio sprint from the starting line – and keep going toward your optimal finish line.
- Diversification does not ensure a profit or protect against a lose
HarbourVest Partners, LLC (“HarbourVest”) is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes; the information should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. In addition, the information contained in this document (i) may not be relied upon by any current or prospective investor and (ii) has not been prepared for marketing purposes. In all cases, interested parties should conduct their own investigation and analysis of the any information set forth herein and consult with their own advisors. HarbourVest has not acted in any investment advisory, brokerage or similar capacity by virtue of supplying this information. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy or completeness of such information. The information is subject to change without notice and HarbourVest has no obligation to update you. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest.
An investment in the private markets involves high degree of risk, and therefore, should be undertaken only by prospective investors capable of evaluating the risks of the Fund and bearing the risks such an investment represents.
Risks of Private Investments Strategies. A fund’s investment portfolio will include Direct Investments, Secondary Investments and Primary Partnership Investments. The private funds (“Portfolio Funds”) and special purpose vehicles that the Fund invests in will hold securities issued primarily by private companies. Operating results for private companies in a specified period may be difficult to determine. Such investments involve a high degree of business and financial risk that can result in substantial losses.
Risks of Direct Investments. A fund’s investment portfolio will include Direct Investments, which are direct or indirect investments in the equity of private companies, alongside private equity funds and other private equity firms. There can be no assurance that the fund will be given Direct Investment opportunities, or that any specific Direct Investment offered to the fund would be appropriate or attractive to the fund in the Adviser’s judgment. In addition, the Adviser may have little to no opportunities to negotiate the terms of such Direct Investments. The fund’s ability to dispose of Direct Investments may be severely limited.
Risks of Secondary Investments. A fund may make Secondary Investments in Portfolio Funds by acquiring the interests in the Portfolio Funds from existing investors in such Portfolio Funds. In such instances, it is generally not expected that the Fund will have the opportunity to negotiate the terms of the interests being acquired, other than the purchase price, or other special rights or privileges. Moreover, there is no assurance that the fund will be able to purchase interests at attractive discounts to net asset value, or at all. The overall performance of the fund will depend in large part on the acquisition price paid by the Fund for its Secondary Investments, the structure of such acquisitions and the overall success of the Portfolio Fund.
Risks Related to the Structure and Terms of a Private Markets Fund. Investments in a fund of funds structure may subject investors to additional risks which would not be incurred if such investor were investing directly in private equity funds. Such risks may include but are not limited to (i) multiple levels of expense; and (ii) reliance on third-party management. In addition, a Portfolio Fund may issue capital calls, and failure to meet the capital calls can result in consequences including, but not limited to, a total loss of investment.
Illiquidity of Interests; Limitations on Transfer; No Market for Interests. An investment in a drawdown fund, unlike an investment in a traditional listed closedend fund, should be considered illiquid. The Shares are appropriate only for investors who are comfortable with investment in less liquid or illiquid portfolio investments within an illiquid fund. Unlike openend funds (commonly known as mutual funds), which generally permit redemptions on a daily basis, the Shares will not be redeemable at a Shareholder’s option. Unlike stocks of listed closedend funds, the Shares are not listed, and are not expected to be listed, for trading on any securities exchange, and the fund does not expect any secondary market to develop for the Shares in the foreseeable future.
Risk of Loss. There can be no assurance that the operations of a strategy will be profitable or that the strategy will be able to avoid losses or that cash from operations will be available for distribution to the limited partners. The possibility of partial or total loss of capital of the strategy exists, and prospective investors should not subscribe unless they can readily bear the consequences of a complete loss of their investment.
Evergreen Investing Risk. An evergreen fund is an alternative investment fund that has an indefinite life span and continuously raises capital rather than having a predetermined fundraising period and lifecycle, as do traditional private equity or venture capital funds. Prospective investors should be aware that an investment in an alternative investment is speculative and involves a high degree of risk. Alternative Investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; can be highly illiquid; may not be required to provide periodic pricing or valuation information to investors; may involve complex tax structures and delays in distributing important tax information; are not subject to the same regulatory requirements as mutual funds; and often charge high fees. There is no guarantee that an alternative investment will implement its investment strategy and/ or achieve its objectives, generate profits, or avoid loss. An investment should only be considered by sophisticated investors who can afford to lose all or a substantial amount of their investment.
HarbourVest Partners, LLC (“HarbourVest”) is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes; the information should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. In addition, the information contained in this document (i) may not be relied upon by any current or prospective investor and (ii) has not been prepared for marketing purposes. In all cases, interested parties should conduct their own investigation and analysis of the any information set forth herein and consult with their own advisors. HarbourVest has not acted in any investment advisory, brokerage or similar capacity by virtue of supplying this information. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy or completeness of such information. The information is subject to change without notice and HarbourVest has no obligation to update you. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest.
An investment in the private markets involves high degree of risk, and therefore, should be undertaken only by prospective investors capable of evaluating the risks of the Fund and bearing the risks such an investment represents.
Risks of Private Investments Strategies. A fund’s investment portfolio will include Direct Investments, Secondary Investments and Primary Partnership Investments. The private funds (“Portfolio Funds”) and special purpose vehicles that the Fund invests in will hold securities issued primarily by private companies. Operating results for private companies in a specified period may be difficult to determine. Such investments involve a high degree of business and financial risk that can result in substantial losses.
Risks of Direct Investments. A fund’s investment portfolio will include Direct Investments, which are direct or indirect investments in the equity of private companies, alongside private equity funds and other private equity firms. There can be no assurance that the fund will be given Direct Investment opportunities, or that any specific Direct Investment offered to the fund would be appropriate or attractive to the fund in the Adviser’s judgment. In addition, the Adviser may have little to no opportunities to negotiate the terms of such Direct Investments. The fund’s ability to dispose of Direct Investments may be severely limited.
Risks of Secondary Investments. A fund may make Secondary Investments in Portfolio Funds by acquiring the interests in the Portfolio Funds from existing investors in such Portfolio Funds. In such instances, it is generally not expected that the Fund will have the opportunity to negotiate the terms of the interests being acquired, other than the purchase price, or other special rights or privileges. Moreover, there is no assurance that the fund will be able to purchase interests at attractive discounts to net asset value, or at all. The overall performance of the fund will depend in large part on the acquisition price paid by the Fund for its Secondary Investments, the structure of such acquisitions and the overall success of the Portfolio Fund.
Risks Related to the Structure and Terms of a Private Markets Fund. Investments in a fund of funds structure may subject investors to additional risks which would not be incurred if such investor were investing directly in private equity funds. Such risks may include but are not limited to (i) multiple levels of expense; and (ii) reliance on third-party management. In addition, a Portfolio Fund may issue capital calls, and failure to meet the capital calls can result in consequences including, but not limited to, a total loss of investment.
Illiquidity of Interests; Limitations on Transfer; No Market for Interests. An investment in a drawdown fund, unlike an investment in a traditional listed closedend fund, should be considered illiquid. The Shares are appropriate only for investors who are comfortable with investment in less liquid or illiquid portfolio investments within an illiquid fund. Unlike openend funds (commonly known as mutual funds), which generally permit redemptions on a daily basis, the Shares will not be redeemable at a Shareholder’s option. Unlike stocks of listed closedend funds, the Shares are not listed, and are not expected to be listed, for trading on any securities exchange, and the fund does not expect any secondary market to develop for the Shares in the foreseeable future.
Risk of Loss. There can be no assurance that the operations of a strategy will be profitable or that the strategy will be able to avoid losses or that cash from operations will be available for distribution to the limited partners. The possibility of partial or total loss of capital of the strategy exists, and prospective investors should not subscribe unless they can readily bear the consequences of a complete loss of their investment.
Evergreen Investing Risk. An evergreen fund is an alternative investment fund that has an indefinite life span and continuously raises capital rather than having a predetermined fundraising period and lifecycle, as do traditional private equity or venture capital funds. Prospective investors should be aware that an investment in an alternative investment is speculative and involves a high degree of risk. Alternative Investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; can be highly illiquid; may not be required to provide periodic pricing or valuation information to investors; may involve complex tax structures and delays in distributing important tax information; are not subject to the same regulatory requirements as mutual funds; and often charge high fees. There is no guarantee that an alternative investment will implement its investment strategy and/ or achieve its objectives, generate profits, or avoid loss. An investment should only be considered by sophisticated investors who can afford to lose all or a substantial amount of their investment.
Tax Risks. An investment in the strategy involves tax risks, which may be material, including the risk of tax payments and tax filing obligations in multiple jurisdictions, which may apply both to the investor and the strategy. The taxation of the strategy and investors in the strategy is complex and subject to uncertainty. Prospective investors should consult with their tax, legal, and accounting advisers prior to making an investment in the strategy in light of their specific circumstances.