$125M Evergreen Fund

When I came out of my own startup in 2002, I decided to focus my efforts on public land preservation and low-income housing. I signed a bunch of different (financial) products, and quite frankly didn’t know much about US products, closed-end funds, and tax implications.

When I had to restructure our family trust, I had looked at lots of different vehicles, like a Business Development Company, but was uncomfortable with the audit and reporting requirements. Several things pushed me towards an evergreen fund:

• A single investor fund (“SIF”) can have very different terms regarding timing, operations, reduced management fees, strategic customized reporting, and tax advantages. I can structure the flow of capital through the use of blockers, grantor trusts, and other alternatives can be accomplished with relative ease, which will minimize unnecessary expense and tax drag.
• An evergreen fund permits the continual recycling of capital. At the same time, I structured several different “classes” of assets that operate as a type of fund within a fund, each with different carried interest. The different classes are necessary because of some land trusts, closed-end hedge funds, public assets. I am intending to slowly migrate to private equity / venture capital, but that will take some time depending on cash flows.
• Transferability of a SIF played a big part of the decisions.
• While the fund has a single investor, I can pay the manager — me! — management fees that provides cash flow for living expenses.

The Future: Tokenization

Obviously, the fund is going to grow its book value (or cost basis) due to its continuing recycling. But it (hopefully) will also grow its Net Asset Value (“NAV”). While I’m sorting out the different financial products and their cash flows, I can see a future where the fund becomes tokenized and freely tradeable, with somewhat immediate liquidity (when buyers and sellers match, or when I decide to buy back tokens); and at a valuation that is determined by the market, not by some (somewhat arbitrary) valuation method, like “last round’s valuation”, or “market adjusted option pricing model”. And the assets could be transparently on chain, so people can also lend against real assets.

It is also a different way of fund raising: LPs can join and leave, trade their interest without feeling bad, smart contracts take care of collaterals for capital calls and the capital calls itself, and a Distributed Autonomous Organizations (“DAOs”) could — to some extend — make certain decisions.

My dear friend Seth Priebatsch over at Groma is doing a similar approach within real estate. I think there are many other areas where tokenization makes sense.