Growing numbers of private market investors are integrating alternative investment structures ("alternatives") into their portfolios to provide diversification and potentially higher returns independent of public markets. Alternatives fall outside traditional categories like stocks, bonds, or cash. These financial assets include private equity, hedge funds, real estate, commodities, and infrastructure. Within the alternatives category, Evergreen BDC (Business Development Company) funds are particularly attractive to private market investors with a long-term mindset. A BDC is a type of investment company that invests in small- to mid-sized businesses, providing them with capital for growth or restructuring while offering investors high dividends and a way to participate in private equity-like investments without demanding significant capital.
Unlike traditional closed-end funds with predetermined durations, Evergreen BDCs do not have a fixed end date. They operate continuously, allowing for capital raising, investing, and redemptions (under certain conditions), and can accommodate follow-on investments in portfolio companies that have demonstrated value over time. As a result, these structures can offer high flexibility, liquidity, and lower risk.
Evergreen BDCs can focus on either equity or debt investments, with the key differences being the nature of the assets they invest in. Each type of Evergreen BDC caters to different investor needs for liquidity, investment horizon, and risk profiles.
Investors familiar with the BDC structure likely know it as a debt vehicle. Debt Evergreen BDCs are a good fit for investors seeking a relatively low risk profile and a way to generate stable returns. These vehicles have a lower risk profile because they are higher in the capital structure and often have collateral backing, ensuring priority in case of liquidation. While debt BDCs offer a lower potential for capital appreciation, investors can use them to generate regular income through interest payments on debt securities.
Equity evergreen BDCs primarily invest in equity securities in small- to mid-sized companies and have a higher risk and return profile. They are well-suited to investors seeking capital appreciation in equity holdings. These assets tend to be more volatile than debt BDCs because company value can fluctuate. Still, they present the potential for higher returns.
Investing in Debt and Equity Evergreen BDC funds can support a well-balanced portfolio for investors seeking exposure to private markets with the liquidity of public markets. They each contribute a balanced blend of income, diversification, growth potential, and professional management. With their unique structure and benefits, Evergreen funds are especially well-suited to the evolving investment landscape. That is likely one reason why approximately 90% of registered investment advisors (RIAs) plan to increase the percentage of alternatives within their clients' portfolios to 10-15% within the next five to ten years. (Source)
One of the most exciting things about Evergreen BDC funds is that they open access to more investors to participate in high-growth private market companies. Growing numbers of U.S. households qualify to participate in private market investing. In fact, roughly one in ten households qualifies as an accredited investor by meeting one of the following qualifications. (Source)
Determining how much of a portfolio to allocate to these funds should begin with clearly defining the investor's goals related to liquidity, compounding returns, capital preservation, and more. Investing in a multi-stage, multi-sector Evergreen BDC can offer a balanced blend of income, diversification, and growth potential appealing to investors seeking exposure to private markets with the liquidity of public markets.
Join us for an upcoming webinar to learn more about Alternatives and Evergreen BDC structures.
