Evergreen PE Funds Face Scrutiny Over "NAV Squeezing"

What's New

A new episode of Fund Shack's Private Markets Podcast is surfacing a growing debate over whether secondaries focused evergreen private equity funds are generating artificial performance by purchasing assets at discounts to GP reported NAV and immediately marking them up, a practice critic Tim McGlinn calls "NAV squeezing." McGlinn, author of The AltView Substack, argues that billions flowing monthly into these structures may be enriching managers at the expense of future investors, while host Ross Butler pushes back that illiquid asset valuation legitimately differs from liquid price discovery.

Why It Matters

Evergreen PE vehicles are now the primary growth engine for alternative asset managers pushing into private wealth, defined contribution plans, and retail adjacent channels. If the structural critique holds, the industry's fastest scaling product category could be transferring value from later investors to earlier ones and to managers, with fee crystallization on unrealized gains accelerating the extraction. The absence of independent scrutiny relative to the scale of capital inflows makes this a systemic concern rather than a niche accounting debate.

Big Picture Drivers

• Fee restructuring: Managers are shifting from realized gain carry with 8% hurdles to NAV based performance fees with zero hurdles, exemplified by Hamilton Lane's shareholder vote that unlocked $58 million in previously unpayable compensation

• Secondary market mechanics: Assets purchased at auction driven discounts (often ~10% below GP NAV) are immediately re marked to full GP valuation, generating "performance" without any change in underlying asset value

• Capital flood dynamics: Billions per month are flowing into evergreen structures, and sustained inflows mask the dilution problem because new money funds new discount purchases that generate fresh paper gains

• Accountability gaps: McGlinn argues investment consultants and fiduciaries approve allocations without declaring independent return expectations or tracking decision quality against benchmarks

• Regulatory ambiguity: U.S. accounting standards (ASC 820) require fair value based on arms length transactions, yet the industry continues using GP marks rather than secondary auction prices as the valuation anchor

By The Numbers

• $5B: Current AUM of the Aries Private Markets Fund, grown from $100K in seed capital in roughly two to three years

• $1B+/month: Estimated current pace of inflows into evergreen PE vehicles

• $58M: Performance fees Hamilton Lane extracted after switching from an 8% hurdle to a zero hurdle NAV based structure

• 70 to 80%: McGlinn's estimate of the share of certain evergreen fund returns attributable to NAV squeezing rather than genuine value creation

• 0%: The new industry standard hurdle rate for evergreen fund performance fees, down from the traditional 8%

Memorable Quotes

• On the core mechanic: "A fund gets launched, it can buy things on its first day, immediately say that they're worth more, performance looks great, and that begets inflows which beget more NAV squeezing." — Tim McGlinn, describing the self reinforcing cycle that powers evergreen secondary fund marketing

• On industry rationalization: "I think the ability to make easy money is winning over the long term reputational considerations." — McGlinn, on why managers are adopting structures that historically would have been considered misaligned

• On the valuation debate: "You can't value an illiquid asset like a liquid asset... as long as I control the ownership, I'm the one that calls the shots." — Ross Butler, presenting the conceptual case for GP marks over secondary market prices

• On the scrutiny gap: "I asked her, 'Who else besides you and me is looking at these filings from these companies?' Because if no one's actually looking at them, how much good does it really do?" — McGlinn, on the absence of independent analysis relative to the scale of capital at stake

Key Trends to Watch

• Endgame risk: McGlinn predicts that when inflows slow, managers will convert evergreen vehicles into listed structures, exposing investors to public market discounts similar to Blue Owl's real estate fund experience.

• Average dollar divergence: The gap between a fund's since inception return and the experience of the average dollar invested will widen dramatically as AUM scales, making headline track records increasingly misleading.

• Regulatory attention: The SEC under Gary Gensler previously flagged PE cost concerns, and the commercialization of NAV based fee structures without hurdles could attract renewed scrutiny.

• Industry self policing pressure: KKR has made critical comments about these structures, suggesting the prisoner's dilemma dynamic may eventually force a reckoning among managers competing for institutional credibility.

The Wrap

The evergreen PE boom represents the industry's most consequential structural evolution in decades, but the marriage of illiquid assets with semi liquid wrappers has introduced misalignments that traditional drawdown funds never faced. Allocators entering these vehicles today should demand transparency on what percentage of reported returns derive from secondary discount markups versus genuine portfolio appreciation, and they should view zero hurdle NAV based fee structures as a meaningful departure from the alignment principles that built the asset class. The critical question is not whether these funds can deliver returns, but whether the returns being reported today will be the returns experienced by the majority of capital committed.