Project the quarters at the redemption cap, net of what the portfolio still distributes, and solve for the opening sleeve.
Size the sleeve to pay redemptions at the cap for the number of stressed quarters you want to survive, net of the cash the portfolio still distributes, and still leave an operating floor. For a 1,000 fund with a 5 per cent quarterly cap, four quarters at the cap, distributions of 1.0 per cent of the private book a quarter and a 2 per cent floor, the answer is 169.0, or 16.9 per cent of NAV, not the 20 per cent that four times the cap suggests. At a 7.5 point return gap it costs 127 basis points a year.
Worked in full in The Evergreen Fund Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The liquidity sleeve is the cash, money market funds and liquid credit an evergreen or semi-liquid fund holds alongside its private portfolio so that redemptions can be paid without selling private assets in a hurry. It is the single biggest design choice in the product: too small and the gate comes down at the first difficult quarter, too large and the fund drags its own return below the closed-ended alternative it is sold against. The sizing is a short cash-flow projection, and it can be done on one page.
| Input | Value |
|---|---|
| Fund NAV at the start of the stress | 1,000 |
| Redemption cap, per quarter, share of NAV | 5% |
| Consecutive quarters at the cap to survive | 4 |
| Subscriptions during the stress | none |
| Private portfolio distributions, per quarter | 1.0% |
| Minimum sleeve left at the end, share of NAV | 2% |
| Private portfolio return / sleeve return, a year | 11.0% / 3.5% |
Each quarter the fund pays 5 per cent of the NAV at the start of that quarter. NAV shrinks as redemptions are paid, so each payment is smaller than the last. The private book keeps distributing, which refills the sleeve a little. Private valuations are held flat here to isolate the liquidity question.
Sleeveq = sleeveq−1 + distributionsq − cap × NAVq−1
Solve for the opening sleeve that leaves exactly 2 per cent of NAV after the last quarter. In Excel, build the four rows and use Goal Seek on the opening sleeve, or solve it directly: opening sleeve = total redemptions − total distributions + closing floor.
| Quarter | Opening NAV | Redemptions paid | Distributions in | Sleeve at end | NAV at end |
|---|---|---|---|---|---|
| 1 | 1,000.0 | 50.0 | 8.3 | 127.4 | 950.0 |
| 2 | 950.0 | 47.5 | 8.2 | 88.1 | 902.5 |
| 3 | 902.5 | 45.1 | 8.1 | 51.1 | 857.4 |
| 4 | 857.4 | 42.9 | 8.1 | 16.3 | 814.5 |
| Total | 185.5 | 32.7 |
Check it: 185.5 paid out, less 32.7 received, plus a closing floor of 16.3 (2 per cent of 814.5) gives 169.0, the opening sleeve. The fund has met every request for a year at the full cap and has not sold a private asset.
Drag = sleeve share × (private return − sleeve return) = 16.9% × 7.5 points = 127 basis points a year.
Nobody invoices it and it appears in no expense ratio, but it is a real cost to every investor, including the ones who never redeem.
| Quarters at the cap | Distributions 0.5% | Distributions 1.0% | Distributions 2.0% | Drag, bps |
|---|---|---|---|---|
| 2 | 10.7% | 9.8% | 7.9% | 73 |
| 4 | 18.6% | 16.9% | 13.5% | 127 |
| 6 | 25.8% | 23.5% | 18.7% | 176 |
| 8 | 32.3% | 29.5% | 23.6% | 222 |
The number of quarters is the expensive dial. Moving from four to eight quarters of protection adds 95 basis points of drag. Distributions matter less, but they move in the wrong direction at the wrong time: in a real stress, exits slow, and the 0.5 per cent column is the one to plan on.
A markdown before the run does not change the percentage. Mark the private book down 10 per cent before the redemptions start and the sleeve needed falls to 154.8, which is 15.5 per cent of the old NAV but still 16.9 per cent of the new one. Because the cap is a share of current NAV, the requirement scales with the fund. The markdown does the rebalancing for you: a sleeve that was 15.5 per cent beforehand is automatically 16.9 per cent afterwards.
Decide how many quarters at the cap the fund must survive, project them with distributions at a stressed rate, and solve for the opening sleeve. Then put the drag next to it so the board sees the price of each extra quarter. The liquidity plan and the sleeve sized three ways are among the working documents in the free companion files for this book. For the regulatory version of the same question, see how to compute a reverse stress level; for whether the drag is worth paying, the IRR at which a closed-ended fund merely ties an evergreen.
Because the cap applies to a NAV that shrinks as redemptions are paid, and the private book keeps distributing. Four quarters at 5 per cent pay 185.5 on a 1,000 fund, not 200, and distributions return 32.7, so a 16.9 per cent sleeve suffices where 20 per cent would over-reserve by 3.1 points.
The sleeve's share of NAV times the gap between the private return and the sleeve return. A 16.9 per cent sleeve with private assets at 11.0 per cent and the sleeve at 3.5 per cent costs 127 basis points a year. Protection for eight quarters instead of four raises it to 222.
Only as a bridge. A facility has to be repaid from the same portfolio, and lenders tend to tighten in the quarters when redemptions peak. Size the sleeve to survive the stressed quarters on its own, then treat the facility as timing support rather than as liquidity.
This article is one calculation from The Evergreen Fund Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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