Evergreen vs closed-end fund: the impact on your SME

A closed-end fund has an end date: it must sell its holdings before that term. An evergreen fund has none: it can remain a shareholder for as long as the project requires. For the owner of a family SME, the difference shows at exit time, and often years earlier, when a project runs late.

What is an evergreen fund?

It is a fund with permanent capital. It reinvests the proceeds of its sales and does not have to repay its backers on a common date. It can therefore stay in a company's capital for as long as the project justifies.

On the other side, a closed-end fund raises money from its backers, invests it over a few years, then has to return it with the gain before a date set when the fund was created. All its holdings must be sold before that term. This is the most common model in private equity and venture capital.

In Belgium, both models coexist, sometimes under the same roof. ORSA (formerly Investsud), a Walloon fund active since 1985, describes itself as an open evergreen fund with no imposed exit horizon. Theodorus, a seed fund linked to the ULB university, manages several vehicles: Theodorus I is evergreen, Theodorus II and III are closed-end funds of 12 to 14 years. Gimv, a Belgian private equity investor, is a third model that I have not surveyed in detail, so I do not quote its terms.

The comparison, criterion by criterion

The last column is the one people forget most often, and it matters. Walloon provincial "invests" (regional public-private investment companies) are neither closed-end funds nor evergreen funds in the marketing sense. They are permanent companies that set a horizon deal by deal. For a family SME, that is a third option.

Why must a closed-end fund exit?

Because it has promised its backers to return their money by a given date. It is not a preference; it is a contractual obligation.

A simple calculation shows where the tension lies. Take a 12-year closed-end fund that invests in your SME in year 6 of its life. It has at best 6 years left to come in, grow the value and get out. If it comes in during year 9, it has 3. For you, the same fund does not offer the same horizon depending on when you sign. That is why the first question is about the vehicle's age, not its name.

The difference stays theoretical as long as all goes well. It becomes real in three situations, all of which I have seen:

• The project runs late. A plant that starts six months behind schedule, a permit that drags: a closed-end fund close to its term has less room to wait.
• A new step needs funding. A fund at the end of its investment period often can no longer put more money into its holdings.
• The time to sell is wrong. A depressed market, no buyer in sight: the closed-end fund still has to organise its exit, sometimes by selling the whole company through a drag-along clause.

That last case costs the most. A drag-along clause with no threshold and no floor price lets the fund force the sale of 100% of the shares, yours included. The page on tag-along, drag-along and leaver clauses details what to get written down.

Does an evergreen fund offer a more flexible exit timeline?

An evergreen fund will exit too. Through a sale to another investor, a buyback by the owner or a sale of the company. The difference is that it is not bound by a hard deadline.

But the label does not set the policy. A young closed-end fund can offer a long horizon. An evergreen fund can have a fast turnover policy. ORSA does not publish an average holding period, so I cannot tell you how long it stays in the capital on average. Ask.

Follow-on investment: the forgotten criterion

This is the one that struck me most when reading agreements from the financial controller's chair. An industrial SME that needs a second production line three years after the fund came in expects its shareholder to follow. A closed-end fund at the end of its investment period often cannot, however willing it is.

The figure published by Namur Invest sheds light on this: three to four interventions per company on average. A permanent shareholder puts more money in. A closed-end fund at the end of its life does not.

The edge case always plays out the same way: the financial shareholder can no longer follow, and the company has to bring in a new investor for the second step. New round, new valuation, new dilution for the family. The original fund has done nothing wrong. Its timetable is simply no longer the company's.

Which one suits a family SME?

Generally, the evergreen fund or the permanent invest. A family SME rarely aims to sell to an industrial buyer within five years: it is preparing a succession, often slow, sometimes to a son or daughter who is not ready yet. A shareholder with no hard deadline allows for that time. ORSA explicitly targets the growth, buyout and succession of Walloon SMEs with 20 to 150 employees.

That does not make a closed-end fund a bad choice. It suits a project whose horizon matches its own: fast growth, a planned sale to an industrial buyer, an owner who wants out. The risk arises when the two timetables diverge. If you are retiring in four years, the page on choosing evergreen or closed-end before retirement covers that exact case.

The regional question has little effect on structure: an evergreen or closed-end fund works the same way in Namur, Brussels or Ghent. It does affect which players are available. In Wallonia, the provincial invests and private funds such as ORSA; in Brussels, finance&invest.brussels (the Brussels-Capital Region's public financing body), which acts alongside banks and private funds; in Flanders, PMV, which I have not surveyed.

Four questions to ask the fund, whatever its structure

1. What is your vehicle's end date, and how many years do you have left to invest?
2. Can you reinvest in the company at a later step?
3. How long do you stay in the capital of your holdings on average?
4. How did you handle your last exits: owner buyback, sale to another fund, trade sale?

The answers count for more than the label. Get them confirmed in writing, and have your lawyer or accountant review the letter of intent before you sign.