A fast-growing evergreen fund carries a second cash balance on top of its liquidity sleeve: the money it has taken but not yet invested. Its cost is a simple product.
Steady-state cash drag from subscriptions is the monthly net inflow, as a share of NAV, times the average months it takes to deploy, times the gap between the private return and the cash return. An illustrative evergreen fund taking 2 per cent of NAV a month and deploying it in four months holds 8.0 per cent of NAV in pipeline cash; with private assets earning 12.0 per cent and cash 4.0, that costs 64 basis points a year, a fund return of 11.36 per cent instead of 12.0. It comes on top of the liquidity sleeve, not instead of it.
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 fund is fictional and every rate is illustrative, chosen to show the mechanism rather than describe any market.
| Input | Value |
|---|---|
| NAV | 1,000 |
| Net subscriptions, per month | 2% of NAV (20) |
| Average time from subscription to deployment | 4 months |
| Return on private assets | 12.0% |
| Return on cash | 4.0% |
| Liquidity sleeve, held separately | 10% of NAV |
Two per cent a month is 24 per cent of NAV a year: a fund in the fast-growth phase that semi-liquid vehicles often go through after launch on a wealth platform.
Pipeline cash = monthly inflow × months to deploy
= 2% × 4 = 8.0% of NAV, or 80 on a NAV of 1,000
This is a stock that refills as fast as it drains. Each month's subscriptions replace the month that has just been invested, so in steady state the fund always holds about four months of inflows in cash, whatever the deal flow looks like.
Drag = pipeline cash × (private return − cash return)
= 8.0% × (12.0% − 4.0%) = 8.0% × 8.0 points = 64 bp a year
Fund return = 12.0% − 0.64% = 11.36%
Excel: =Inflow_pm*Lag_months*(R_private-R_cash)
A month-by-month simulation of the same fund over five years, with each month's inflow invested exactly four months later, settles at 7.5 per cent of NAV in pipeline cash and a drag of 62 basis points. The shortcut overstates slightly because the NAV itself grows while the cash waits, but it is close enough for any memo.
Total cash = 8.0% pipeline + 10% sleeve = 18% of NAV
Total drag = 18% × 8.0 points = 144 bp; fund return = 10.56%
The sleeve accounts for 80 basis points and the pipeline for 64, 44 per cent of the total. The sleeve is a design choice the manager discloses and defends; how large it should be is worked in how big an evergreen fund's liquidity sleeve should be. The pipeline is a by-product of success that rarely appears in any document.
| Inflow per month, % of NAV | Per year | 2 months to deploy | 4 months | 7 months |
|---|---|---|---|---|
| 0.5 | 6% | 8 | 16 | 28 |
| 1.0 | 12% | 16 | 32 | 56 |
| 2.0 | 24% | 32 | 64 | 112 |
| 3.0 | 36% | 48 | 96 | 168 |
The two inputs multiply, so they compound each other. A fund that raises fast in a market where it cannot buy fast, 3.0 per cent a month and seven months to deploy, loses 168 basis points to pipeline cash alone. Secondaries and co-investments deploy faster than primary commitments, which is one reason semi-liquid funds lean on them during ramp-up; the price of that speed is a separate calculation.
The reverse also holds, and it flatters reported returns. When subscriptions stop, the pipeline empties within the lag and the fund's return rises from 11.36 to 12.00 per cent, a 64 basis point improvement with no change in a single asset. A rise in performance during a quarter of weak inflows is worth decomposing before it is attributed to the portfolio.
Treating the liquidity sleeve as the fund's only cash and reading the sleeve target in the offering document as the drag. In a growing fund the cash on the balance sheet is the sleeve plus the pipeline, and the pipeline varies with flows the manager does not control. The second mistake is to forget who pays: drag is shared by every shareholder pro rata, so an existing holder of $100,000 gives up about $640 a year so that new money can wait for deals. Returns comparisons against closed-ended funds, which never hold their investors' uncalled capital, should account for this explicitly, as in the headline IRR at which a closed-ended fund merely ties an evergreen.
The sleeve cost and the committed-capital comparison, with every input live, are in the free workbook for this case.
The return lost because part of NAV sits in cash instead of private assets. It has two sources: the liquidity sleeve held for redemptions, and subscriptions not yet deployed. In the illustrative fund the sleeve of 10 per cent costs 80 basis points and the pipeline cash of 8.0 per cent costs 64, together 144: the fund returns 10.56 per cent on a 12.0 per cent portfolio.
Because the pipeline cash disappears. A fund taking 2 per cent of NAV a month with a four-month deployment lag carries 8.0 per cent of NAV in cash; when subscriptions stop, that cash is invested within the lag and the return rises from 11.36 to 12.00 per cent with no change in the underlying assets.
All shareholders pro rata, including those who were already invested. A holder of $100,000 in the illustrative fund gives up about $640 a year so that new money can wait for deals. That is the price of growth: the new money creates the cash balance, but every holder, old and new, pays for it in proportion to their shares.
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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