In recent years, the private assets market has experienced a significant structural evolution, characterised by the growing spread of evergreen funds. These instruments are partially broken off from the traditional model of historically dominant closed funds in the private equity, private debt and real assets investment sectors. Unlike closed investment funds, which provide for a defined time horizon and a structured investment and disinvestment mechanism, evergreen funds allow the subscription and reimbursement of shares on a periodic basis. This increased flexibility has facilitated a progressive opening of private markets to categories of non-institutional investors, contributing to the phenomenon of so-called retailing.
However, this development raises important legal issues, in particular a structural tension emerges between the - albeit disciplined - promise of liquidity and the inherently ill-liquid nature of the underlying instruments.
The aim of this article is to analyse the main legal implications of this tension, with specific reference to the operator's obligations, disclosure profiles and investor protection.
Regulatory framework of evergreen funds
From a legal point of view, evergreen funds do not constitute an autonomous category defined by European Union law. Rather, they are located in the framework of alternative investment funds (IFA), governed by Directive 2011/61/EU (AIFMID) and its recent update known as AIFMD 2 (EU Directive 2024/927) transposed into Italian law by Legislative Decree 39/2026.
Unlike the harmonised UCITS (Undertakes for Collective Investment in Transferable Securities) funds, which are characterised by high liquidity standards, AIFs have greater structural flexibility. This flexibility allows the creation of hybrid vehicles, such as evergreen funds, which combine typical elements of open funds (the possibility of periodic redemption) with features specific to closed funds (investment in liquid assets).
In the absence of specific rules, the rules applicable to evergreen funds are therefore based on an adaptation of existing rules, which implies inevitable margins of interpretative uncertainty and an extension of discretion for managers, while on the one hand it favours financial innovation, on the other it requires careful assessment in the light of the general principles of investor protection and risk management.
The liquidity mismatch and the obligations of the operator
The most critical profile of evergreen funds is liquidity mismatch, i.e. the divergence between the liquidity promised to investors and the liquidity that can be actually achieved through the disposal of portfolio assets.
Typical assets of private markets (unlisted corporate participations, liquid loans or infrastructure) are not easily liquidable in the short term without significant losses; this makes it structurally difficult to manage any claims for reimbursement.
The AIFMD and AIFMD 2 Directives impose specific liquidity risk management obligations on AIFM (GEFIA) requiring investment policy to be consistent with the redemption policy. In this context, evergreen funds make extensive use of risk management tools such as liquidity gates, suspension of refunds and side pockets, aimed at limiting or delaying liquidity requests. The liquidity gates allow to limit the total amount of refunds over a given period, avoiding excessive requests to compromise the balance of the fund; the suspensions of refunds allow instead to temporarily interrupt the exits in situations of market stress; finally, the side pockets consist in the separation of investments particularly liquid or difficult to evaluate, subtracting them from the mechanism of reimbursement.
From a legal point of view, the use of such instruments raises important questions: firstly, the question of their compatibility with the principle of equal treatment of investors, particularly where a benefit is conferred on the first-mover-benefit applicants.
This occurs when investors who first request reimbursement leave the fund at a share value which does not yet incorporate the losses or costs resulting from the subsequent sale of liquid assets or the introduction of refunds restrictions (such as gate or suspension). It follows that the remaining investors bear, to a disproportionate extent, the costs of the subsequent liquidation or the limitations on the possibility of exit, with a potential alteration of the balance between participants in the fund.
Secondly, it is necessary to assess whether and to what extent such limitations are consistent with the obligations of fairness and good faith governing the relationship between the manager and the investor. These principles, which are devoid of both sector law and civil law (in particular Articles 1175 and 1375 of the EC Treaty), require the parties to behave in a fair manner and to take account of mutual interests in the performance of the relationship. In the context of the evergreen funds, this results in the need for the manager to exercise the powers of liquidity limitation in a non-arbitrary, proportionate and consistent manner with the collective interest of investors, avoiding unduly favouring some participants at the expense of others. The possible use of such instruments in a distorted or non-transparent manner could therefore supplement a breach of the obligations of correctness, with possible consequences also in terms of liability.
Case Study: Blackstone Real Estate Income Trust - legitimacy and limits in the use of liquidity gates
The case of the Blackstone Real Estate Income Trust (BREIT) exemplifies the structural tension between the liquidity offered to investors and the liquidity of the underlying assets. Between the end of 2022 and the beginning of 2023, against a significant increase in the demand for reimbursement - coming largely from Asian investors and favored by the changed macroeconomic environment marked by the rise in interest rates - the fund activated the liquidity gates provided for in the regulation. Specifically, in November 2022, the group announced that it had met only 43% of the requests for disinvestment received, limiting the redemptions within the threshold of 5% quarterly of the assets.
This gating mechanism is aimed at preserving the integrity of the portfolio, consisting mainly of liquid real estate assets (such as apartments and logistical properties), avoiding that the manager is forced to proceed to forced sales (so-called fire sales) to satisfy the requests for reimbursement.
From the market point of view, the announcement of the restrictions had an immediate impact, leading the Blackstone title to lose 7% on the New York Stock Exchange. From the legal point of view, the case highlights the problem of the so-called liquidity mismatch (relevant under Directive 2011/61/EU (AIFMID)) and, from the civil point of view, the discretion of the manager meets the limit of the duties of correctness and good faith (Articles 1175 and 1375 c.c).
In particular, the BERET case did not give rise to significant legal proceedings, but it did highlight a potential risk of legal action by investors, in particular in relation to the possible breach of information obligations or the injury to equal treatment. Overall, the operator's intervention was considered legitimate, as it was provided for ex ante in the fund's documentation and justified by the need to avoid forced sales of liquid assets.
The case shows that liquidity gates are compatible with the system provided they are exercised in a proportionate, transparent and consistent manner with the collective interest of investors, while at the same time making the role of disclosure in managing investor expectations.
Disclosure and investor protection
A further central profile concerns the quality of the disclosure to investors.
The structural complexity of evergreen funds makes it particularly important to comply with the obligations of disclosure, both in the pre-contractual phase and during the reporting period. Key information tools - such as the information prospectus and Key Information Document (KID) provided for in EU Regulation 1286/2014 PRIIPs (Packaged Retail and Insurance-based Investment Products)
Furthermore, the distribution of such products is subject to the rules of the MiFID II Directive (Markets in Financial Instruments Directive 2014/65/EU), which imposes on intermediaries obligations for the assessment of adequacy and adequacy of the financial instrument compared to the final investor. These obligations are particularly important in the context of the retailing of private markets, as retail investors may not be able to fully understand the risks associated with the limited liquidity of the instruments and make choices that are not fully aware.
Legally, any lack of information or breach of the obligations under the MiFID II Directive may result in mis-selling, i.e. the distribution of financial products that are not adequate to the risk profile of the investor.
In such cases, liability profiles may arise for the placement intermediary (for breach of adequacy and transparency obligations), and, in certain circumstances, for the manager, if the information provided is misleading or incomplete. The legal relevance of such conduct also extends to the civil plan, where the principles on pre-contractual liability (Article 1337 of the Civil Code) are particularly important, which require the parties to behave in good faith in the negotiation and contract formation phase.
In this context, the information asymmetry between intermediary and investor, particularly accentuated in complex products such as evergreen funds, reinforces the need for clear, correct and transparent information. The breach of these obligations may result not only in regulatory sanctions but also in compensation liability, if the investor proves that he has suffered damage as a result of an investment decision taken on the basis of incomplete or incorrect information.
Case Study: Woodford Equity Income Fund - mis-selling deriving from liquidity mismatch
The Woodford Equity Income Fund is a paradigmatic case of crisis resulting from a mismatch between the legal regime and the economic structure of the fund.
The fund, which at its peak in May 2017, managed over £10 billion, was qualified as UCITS and thus characterised by high liquidity and daily redemptions. However, between July 2018 and June 2019, the fund progressively sold liquid assets and increased its exposure to liquid assets through investment decisions defined by the authorities as 'unreasonable and inappropriate'.
In the same two years, following negative performance, there was a massive increase in claims for reimbursement by about three hundred thousand investors. The crisis culminated in the suspension of the fund in June 2019 - when the value had now fallen to 3.6 billion pounds - and in the subsequent liquidation. At the time of the suspension, only 8% of the assets could be settled within the seven days provided by the fund's settlement.
This is a critical example of the risks associated with retailing, i.e. the opening of private markets to non-institutional investors who may not fully understand the risks of liquidity. The main legal issues concern the violation of the principles of the UCITS Framework, which presupposes a high degree of liquidity of assets, as well as the obligations of Directive 2014/65/EU (MiFID II). In particular, there were disputes: the violation of transparency obligations, suitability rule and misleading representation of the product liquidity profile. A lack of supervision by Neil Woodford (founder) on the relationship with the UK's Authorised Corporate Director (ACD) was also identified. These conducts integrate mis-selling assumptions, relevant also from the civil point of view, with possible pre-contractual responsibility pursuant to art. 1337 c.c. for the lack or incomplete representation of the limits to liquidity.
Unlike the BERET case, the case has resulted in concrete interventions by the authorities. The Financial Conduct Authority (FCA) has decided to fine Neil Woodford for about £6 million and its company, Woodford Investment Management, for €40 million, also proposing the prohibition for Woodford to manage the funds for retail investors - the measures are currently subject to recourse. The outcome was particularly significant: the fund was wound up and opened the way to claims for compensation from investors, vis-à-vis the manager and the distributors, for damages deriving from inadequate information, a wrong product qualification and a liquidity management that put at risk the capital entrusted by the savers.
Asset assessment and liability risks
The determination of the value of allowances in evergreen funds typically takes place on the basis of Net Asset Value (NAV), calculated by valuation models adopted by the fund manager, often with the support of independent evaluators.
Unlike regulated markets where prices are determined by the matching of supply and demand, the valuation of liquid assets entails a significant degree of discretion. Although valuation methodologies generally comply with market standards, they do not eliminate the risk of over-estimate or under-evaluation of assets, with distorting effects for investors in the subscription or redemption phase.
In this context, conflict of interest profiles may also emerge. The manager could be encouraged - even indirectly - to adopt criteria that affect the value of the fund in a way that is favourable to the raising of new capital or the management of refunds, resulting in possible prejudices for investors and, once again, possible implications of liability of the manager for breach of obligations of diligence, correctness and transparency.
Case Study: Infinity Q Capital Management - abuse of discretion in the assessment and manipulation of NAV
The Infinity Q Capital Management case concerns an alternative fund characterised by investments in complex derivatives and liquid assets, specifically variance swaps and correlation swaps, the valuation of which depended on internal models.
Between 2017 and 2021, according to the allegations of the Securities and Exchange Commission (SEC), Chief Investment Officer James Velissaris manipulated these models, altering parameters and inputs in order to overestimate the value of assets and, consequently, the Net Asset Value (NAV) of the fund. Specifically, Velissaris secretly manipulated the computer code of pricing models to alter the wide-ranging corridors of swaps, annualization factors and operating prices (strike prices); such manipulations allowed artificially to inflate the value of assets for more than 1 billion dollars.
The case shows serious violations of the law on financial markets; in particular the violation of the anti-fraud rules (Securities Act), the violation of the Investing Advisorys Act and the manager's trust obligations. At the regulatory level, the case involved the violation of Section 34(b) of the Investing Company Act for having issued false statements in documents filed with the SEC and having facilitated the violation of Rule 22c-1, which requires the funds to sell or redeem shares exclusively at the current NAV price.
From a civil point of view, these conducts supplement a violation of the obligations of correctness and diligence in the management, with potential responsibility towards investors for violation of the principle of equal treatment. To conceal the fraudulent plan, the IOC came to falsify the term sheets of the transactions, erasing the real parameters and replacing them with fictitious data to induce the auditors to consider the evaluations of the fund correct.
Unlike the other cases, a real judicial process has developed here. The SEC has initiated formal action for fraud, while investors have promoted class actions based on the misleading representation of the value of the fund.
A relevant legal aspect concerned the insurance litigation: Delaware Superior Court denied the company the cover for legal expenses through summary judgment, establishing the decision on the violation of warranty statements (guarantee statements); Infinity Q had failed to declare the existence of a SEC investigation already in progress at the time of the signing of insurance policies. The consequences were the suspension of refunds and the liquidation of funds, resulting in significant losses for investors. James Velissaris was sentenced to 15 years of imprisonment after he had found himself guilty of fraud on securities. To manage the return of assets, judicial collateral figures have been appointed: an independent Monitor to supervise the private fund and a Special Master for the common fund, in order to ensure a fair distribution of residual funds to the damaged investors.
The case shows that discretion in asset valuation, if not adequately controlled, can degenerate into fraudulent conduct and determine both regulatory and civil liability.
Pressures on refunds and market stress
The above-mentioned criticalities emerge with particular evidence during periods of market stress.
Recent experience in the private credit sector has shown that an increase in claims for reimbursement can put evergreen funds in difficulty, forcing managers to activate liquidity limitation mechanisms.
From a legal point of view, such interventions must be assessed in the light of the forecasts contained in the contractual documentation and the applicable legislation. However, even when formally legitimate, they can have a significant impact on the position of investors, generating litigation and attracting the attention of supervisory authorities. In particular, the problem arises of whether restrictions on reimbursement have been properly communicated and whether they have been applied in a fair and non-discriminatory manner.
Regulatory perspective
The critical issues related to evergreen funds have attracted the attention of the European legislator, who has launched a process of reviewing the regulatory framework applicable to AIFs.
The proposed revision of the AIFMD Directive (AIFMD 2) aims, inter alia, to strengthen liquidity risk management tools by introducing greater harmonisation and supervision. At the same time, ELTIF regulation 2.0 (EU Regulation 2023/606) has extended the possibilities for access to liquid investments, while introducing specific protection measures for retail investors. These developments indicate an increasing awareness of the challenges posed by hybrid instruments, as well as the desire to balance financial innovation with the need to ensure an adequate level of protection.
Conclusions
Evergreen funds represent a significant innovation in the financial market landscape, allowing wider access to private asset investment.
However, their hybrid structure raises important legal issues, in particular in relation to liquidity management and investor protection. The tension between promised liquidity and underlying liquidity is the central hub of these issues, affecting multiple profiles: from the obligations of the operator to the quality of disclosure, to the risks of liability.
In the absence of specific rules, the application of existing rules requires careful and consistent interpretation with the general principles of the system, such as good faith, transparency and equal treatment of investors.
In view of the evolution of the regulatory framework, it will be crucial to ensure the sustainability of the evergreen model, ensuring a balance between the needs for financial market innovation and investor protection.