Drawdown Funds Remain the Right Home for Opportunistic Buyouts

What's New

Opportunistic buyouts need a drawdown fund, because the strategy pays for patience and an evergreen works against it. Bryn Gostin, Managing Director at Apollo, argues this in a podcast conversation with Diana Sands on The Allocation. An evergreen calls 100% of capital upfront. Undeployed cash drags on returns and pushes managers to deploy on schedule. Investors can also redeem while assets need 3 to 5 years to mature. Allocators should match structure to strategy: drawdown for opportunistic buyout, evergreen for private credit and diversified secondaries.

Why It Matters

The argument cuts against the industry push to package every private strategy in a semi-liquid vehicle. Managers launching evergreen buyout funds take the opposite side. Gostin also narrows what evergreen liquidity means. Investors get rebalancing liquidity, but may wait for their capital in a dislocation. Apollo has raised only one buyout flagship and expects its clients to use both structures, so the framework fits its own product lineup.

By The Numbers

• Less than 10%: the share of PE returns that now comes from multiple expansion. Gostin says it was once almost two-thirds.

• Closer to 10%: where distribution yields have fallen over the past 4 or 5 years. They stood around 20% before.

• 9 to 10%: historical net returns for private equity in its bad decades. Public equity's lost decades delivered zero or negative returns.

• 60%: the share of the Russell 3000 held by roughly 50 companies.

Memorable Quotes

• "When you do that in private equity buyout, you become a hammer running after a nail: you find a nail, you do not even evaluate whether it is a good nail." Gostin ties discipline to having one flexible fund instead of many sector-themed ones.

• "If things go well, you will get eighteen percent; if things go poorly, you will get nine or ten, most investors should have some exposure to that." The downside asymmetry is the core of his case for owning the asset class at all.

• "What is not necessarily going to be there is liquidity during a dislocation, whether specific to the fund or broader from a macro perspective." He concedes that evergreen liquidity may disappear when investors want it most.

• "For opportunistic buyout, drawdown just works better because you can wait and find the right opportunity at the right point in the cycle." The line states the thesis in its plainest form.

The Wrap

Gostin's framework works when buyout returns depend on patient entry and operational change. It also depends on deal costs staying high, which rewards managers who can wait. A steady flow of fairly priced deals would weaken it, because an evergreen could then deploy on schedule without overpaying. Redemption limits at evergreen buyout funds in the next downturn would confirm it. The next several vintage years, which Gostin expects to set up well, will settle which structure delivered.