TheDrawdown:DoWeNeedtoDebatetheTrackingError?
By Matthias Plötz
September 4, 2025
In an effort to eliminate NAV distortion in its private equity funds, Omnigence Asset Management has structured its private equity funds as evergreen vehicles with a $1 par pricing model.
According to a whitepaper published by the firm: "GPs often resist marking down assets, creating artificially stable or inflated NAVs that mislead allocation models, distort portfolio construction and obscure true performance. The result is mispriced secondaries, governance challenges and fund performance that can diverge materially from economic outcomes."
Omnigence’s solution is an evergreen fund with a fixed $1 par entry and redemption price where all free cashflows are swept to investors on either a monthly or quarterly basis. Any unrealised gains are retained until they’re monetised and when the fund sells off an asset, excess gains are distributed. The final piece in the puzzle is a return harmonisation across investors.
“The complexity inherent in NAV valuations allows people to game the system,” says Stephen Johnston, director at Omnigence. “An approach based on NAV will lead to under or overvaluing an asset. As time goes on, all that’s left is debating the magnitude of the tracking error.”
While this is negligible for funds with a short lifespan, the tracking error compounds like interest for vehicles with longer time windows, adds Johnston. Which is why the firm sees its approach as the way forward specifically for evergreen structures. Omnigence runs a financial consolidation every month and an impairment test once a year.
However, in conversation with The Drawdown, a valuations specialist raises concerns for the secondaries market, where NAV is most crucial. This structure could enable a manager to game the system by selling to a related fund at a low price and maximising the true value in the sister fund.
Additionally, the guardrails put in place to provide equality to all investors in the fund may not protect them from dilution. Said valuations specialist gives an example of a single investor investing $1 at a $5 cashflow, which means the investor will receive $5 as a distribution. Whereas two investors, bought in at the same price, would only receive $2.5 each.
The whitepaper makes it clear that this particular model of evergreen fund only works for specific investment strategies. Other strategies, for example venture capital or distressed assets, would penalise their early investors if they deployed this model. Similarly, funds focused on high growth in their portfolio companies or deep turnarounds might want to stay away.
But for an evergreen vehicle investing in businesses with high cashflows, this model has resulted in a 12% earnings distribution for Omnigence, says the firm, which invests in the lower midmarket. For its LPs, it eliminates the NAV balancing problem as this doesn’t arise with a par structure.
Two fund structuring lawyers The Drawdown spoke to, however, point out that for the long investment horizons, which institutional investors typically operate at, a misreading of NAV is less of an issue. While, if entering the vehicle directly, investors could be penalised by those who buy in days before a cashflow and sell during periods when cashflows are not expected.
“Critics of this model might suggest that if you generate a high rate of return, you should compound,” says Johnston. “But this is negligible as our institutional investors do not pay tax on their investment returns and our retail investors often come to our fund through specifically structured products, like retirement funds, and can simply redeploy.”
A somewhat similar approach to Omnigence’s proposal can be taken in Ireland, where alternative investment firms with a retail investor base may opt to set up their fund as a typical public limited liability company and a share structure.
However, under the AIFMD, managers need to publish a report of their NAV, which would make the model proposed by Omnigence, if set up to avoid NAV dilution, redundant for European managers. Although there would be a potential angle of contractually agreeing to only trade at €1 to keep in line with the $1 par model.
One US-based lawyer The Drawdown spoke to about this model likened it to the structure of a money market fund – a type of mutual fund that usually invests in short-term debt instruments, cash and cash-equivalent securities. They also maintain the $1 per share NAV.
Omnigence points out that firms that want to look into deploying this type of structure will need to make adjustments to their carry models to reward realised, distributable performance instead of NAV accretion.
But in addition to easing up the NAV calculations, Omnigence’s model puts the focus on DPI instead of IRR, which according to Johnston “limits a GP’s ability to manipulate their track record”. And while they see NAV dilution as less of an issue in primary markets, every source The Drawdown spoke to for this piece pointed out that the conversation becomes different when it comes to clarity of DPI.
Original article here