I recently went down the rabbit hole of evergreen funds.
Funds (or holding companies) that do not have a fixed life.
There is no date at which assets have to be sold and capital returned to investors.
Cash flows stay in the fund (or company) and compound over many years.
The reason this is challenging is because investors generally want visibility into:
- How their money is going to be invested, and
- When they will get their money back
These priorities drive the 5-7 year fund structure that is so common today.
It makes sense if you’re buying 50 auto collision repair shops at a 4x EBITDA multiple over 5 years and then flipping “the portfolio” to a larger PE firm for 8x.
But that’s short-sighted.
Best case you execute the strategy and find a buyer.
Investors enjoy a nice IRR, but have to pay the tax man and hold onto the cash as they wait for their next opportunity to redeploy the capital.
Founders/GPs do well, but then have to start over. Sure, they could do another roll-up in a different industry, but they are starting from scratch.
Both stakeholders lose out on the power of compounding.
Just check out this chart from a 2018 study by Bain:
From the Study:
Bain recently modeled costs and returns for a theoretical long-hold fund selling an investment after 24 years, vs. a typical buyout fund selling four successive companies over that period. If the fund’s portfolio company performs in an equivalent manner during this period, by eliminating transaction fees, deferring capital gains taxation and keeping capital fully invested, the long-hold fund outperforms the short-duration fund by almost two times on an after-tax basis, our analysis shows.
Pretty compelling data.
Long-term funds win—by a factor of 2x.
So the question naturally becomes, “What is the best way to set this up?”
How do you simultaneously offer investors a path to liquidity, but at the same time reinvest most of the cash being generated by your businesses?
Here’s how we’re doing it:
Evermore is the name of our long-term holding company.
Evermore is a C Corporation that today owns profitable businesses generating real cash flow.
Investors can buy into Evermore by purchasing shares.
These shares have a price that is based on the value of Evermore’s assets today and the projected future value of cash flows.
Once every two years, Evermore will facilitate a “liquidity window”.
At that time, the share price will be updated.
Investors have the option to sell their shares at that price.
Evermore is required to keep a fraction of its annual cash flow on reserve to fund those repurchases.
The remaining cash stays within Evermore and is reinvested (to grow the existing businesses or to acquire more).
Now here’s the beauty:
Evermore itself isn’t the only source of “buyside” demand.
New shareholders can buy shares from selling shareholders.
These new shareholders will likely include leaders of Evermore-owned businesses—the very people actively creating shareholder value.
Talk about win-win incentives.
Investors get what they want (liquidity) and the company gets what it wants (the ability to reinvest cash flows).
Overtime, as the power of compounding kicks in, the value of Evermore shares will increase—hopefully exponentially.
Customers win. Investors win. Employees win.
If you’re intrigued by this idea and want to be a part of it, send me an email.
I really appreciate the many of you who reached out last weekend to compliment the 90 day post-purchase update.
Seems like folks enjoy hearing about the work we’re doing inside our portfolio companies.
Good news is that’s the content I like writing about.
So I’m going to continue sharing updates as we build Evermore.
To ensure these updates remain full of value, I’ve decided to change the cadence of these emails.
Going forward, I’ll be sending an issue once every other Saturday (twice a month).
They’ll still hit your inbox around 6:15am PST—no change there.
That’s it for today.
Next issue will be in your inbox on Saturday, October 28th.
I’ll be sharing updates on Software4Nonprofits and deconstructing how we increased profits by 150% in our first year of ownership.
It’s going to be a good one.