Democratization or Delusion? The Structural Shift in Private Capital

Erkka Posti

1. The Structural Shift: Opening the Walled Garden

For decades, private equity, venture capital, and private credit functioned as a walled garden. Access has been restricted to institutional giants such as pension funds and sovereign wealth funds who could afford to lock up capital for ten to fifteen years and meet multi-million dollar investment minimums. However, the financial landscape is currently undergoing a massive structural shift often termed the “democratization” of private capital.

So-called (wealth-focused) evergreen funds have recently eclipsed $400 billion in net assets, with registered interval and tender offer funds doubling in size over the past three years to pass $110 billion in 2025 (PitchBook, 2025). This movement seeks to package traditionally illiquid assets for retail and mass-affluent investors, offering “semi-liquidity” through vehicles that allow periodic redemptions. While the industry frames this as a win for financial inclusion, the rapid influx of retail capital into opaque assets raises a fundamental question: is this a genuine financial innovation, or a “demoCRAZYation” that masks systemic risks?

2. Assessing the Mechanism: Evergreen vs. Drawdown Structures

The primary appeal of the evergreen structure, specifically Rule 23c-3 interval funds, is the removal of the traditional drawdown model. Instead of a “J-curve” where investors commit capital and wait years for it to be called and then returned, evergreens are open-ended. Investors enter at a reported Net Asset Value (NAV) and can typically request to redeem 5% of their shares quarterly.

While open-ended structures have existed for decades in real estate (for example, Blackstone’s BREIT), the newer products seem to include a much broader and more aggressive set of assets like venture capital and distressed debt. Early research on the topic suggests that while the average risk-adjusted performance is similar across fund types, evergreen funds lead to substantially less variation in cash flows and portfolio risk levels for the individual investor compared to a staggered series of closed-end funds (Brown & Volckmann, 2025). This “smooth” experience is precisely what makes them so attractive to the retail market – but it is also where the danger lies.

3. The Valuation Friction: The “Look-Through” Problem

A core friction exists between the liquidity offered to investors and the inherently illiquid nature of the underlying private assets. Because these assets do not trade on public exchanges, fund managers cannot rely on market prices. Instead, they rely on “Level 3” inputs – subjective internal models – or NAVs reported by third-party private managers.

This creates what could be called a “look-through” problem. It is an interesting question to investigate whether the reported stability of these funds is an economic reality or an artifact of accounting discretion. Preliminary evidence suggests a potential “valuation trap”: while public markets may be in a tailspin, evergreen NAVs often remain curiously flat. This phenomenon, known as NAV smoothing, may mask true portfolio volatility. It allows managers to report steady growth, which in turn justifies incentive fees based on unrealized “paper gains” that may never be fully realized in a forced liquidation scenario (EIPA, 2025).

4. Private Credit: The New Performance Frontier?

While private equity has captured the headlines, private credit has had an increasingly important role in the evergreen movement. Recent data shows that broad private credit indexes have outperformed liquid credit markets in both absolute and risk-adjusted terms from 2001 to 2024 (Joenväärä & Suhonen, 2025).

However, benchmarking analysis reveals that models based solely on credit factors may overestimate the alpha in this asset class. For example, Joenväärä and Suhonen (2025) find that a parsimonious two-factor model, incorporating both traded credit and equity factors, accounts for almost 90% of the time variation in private credit returns. The exposure to equity-like risk is significant, suggesting that private credit is not a “magic” low-risk yield generator, but rather a complex hybrid. In their study, leveraged loans and small-cap value equities provide the greatest explanatory power for these returns, particularly in the post-financial-crisis era.

5. Assessing the Path Forward: Transparency or Mirage?

As the evergreen universe expands, the need for a consistent benchmarking framework becomes urgent. Without standardized rules for like-for-like comparisons across asset classes and structures, allocators are left without the tools to evaluate the true value and risk of these funds.

To achieve genuine market efficiency and protect retail participants, I believe that at least the following aspects should be evaluated:

• Mandating Enhanced Valuation Disclosure: Regulators should consider requiring higher transparency regarding the specific time-lag between a public market shock and a corresponding NAV adjustment. Current practices allow for significant “stale pricing,” which can disadvantage entering or exiting investors.

• Implementing Standardized Benchmarking: In light of the high correlation between private credit and equity factors, there is a need for standardized, factor-based models. Accounting for equity-beta in credit portfolios is essential to prevent the overestimation of risk-adjusted returns and to ensure investors understand the true risk profile they are assuming.

• Rigorous Liquidity Stress Testing: Given the “semi-liquid” promise of evergreen structures, funds should be required to demonstrate their ability to handle redemptions during periods of synchronized market stress. In my opinion, it is vital to evaluate whether these vehicles can function without resorting to "gating" (restricting withdrawals), which has previously cooled momentum in the private real estate segment.

6. Conclusion

Diving into the guidelines of this new era of “democratized” private equity, one is left wondering whether the goal is to make a real impact on investor wealth or simply to make the private equity sector appear more stable to the public by turning volatile assets into “smooth” NAV lines.

While the goals of this “democratization” may be well-intended, the mechanisms of evergreen funds likely need further refinement. The most meaningful access to private markets is achieved through transparency, not the illusion of low volatility. There is a risk that investors, lured by the appearance of steady returns, may face a rude awakening if a liquidity mismatch forces a sudden re-valuation of assets. To drive meaningful change, the industry must prioritize engagement with rigorous data and support investments that lead to real, realized returns.

Erkka Posti is a Doctoral Researcher in Finance at Aalto University School of Business.

References

Brown, G. & Volckmann, W. (2025). Evergreen vs. Drawdown Funds: Risk, Returns and Cash Flows. Institute for Private Capital.

Carmean, Z. (2025). The Return of Evergreen Funds: Analyzing the performance of interval and tender offer funds. PitchBook Institutional Research.

Clark, E. (2025). Evergreens: The Tree That Never Sheds. EDHEC Infrastructure & Private Assets Research Institute.

Ewens, M. & Faber, J. (2025). Private market evergreen vehicles. Columbia Business School Finance Division.

Joenväärä, J. & Suhonen, A. (2025). Benchmarking Private Credit. Aalto University Working Paper.