Behind-the-Scenes: What Happens When You Cap Subscriptions in an Evergreen Fund?

Inside the operational realities of managing investor demand while maintaining investment discipline

Since launching our Fusion Fund in December 2023, we've faced a challenge that many fund managers would consider a "good problem to have": more investor demand than we can accommodate. For every quarterly subscription period, we've had to cap new subscriptions to maintain the investment discipline that has defined Hg for 25 years.

But what does it actually mean to cap subscriptions in an evergreen fund? And why would we turn away capital when the industry often focuses on asset gathering? Here's an inside look at the strategic decisions behind managing an oversubscribed evergreen strategy.

The Quarterly Subscription Approach

Unlike traditional evergreen funds that might accept capital continuously, our Fusion Fund operates on a quarterly subscription schedule. This provides investors with regular entry points while giving us controlled capital management.

New subscriptions are accepted four times per year, allowing us to carefully balance expected inflows against projected investment opportunities. This quarterly approach lets us be more deliberate about when and how much capital we accept.

Investment Discipline Over Asset Gathering

The decision to cap subscriptions reflects a fundamental philosophy: we're not driven by AUM targets. As a privately owned firm, our partners focus on delivering consistent returns rather than maximizing fee income.

Why We Cap Subscriptions:

Performance Protection: Evergreen funds require careful cash management to avoid "cash drag" on returns. Accepting too much capital relative to deployment opportunities can dilute performance.

Investment Standards: Our investment team sources deals at a specific pace. Overwhelming them with excess capital doesn't accelerate deal flow, it just creates pressure to lower investment standards.

Investor Experience: By matching capital with deployment, we provide investors with more consistent exposure to our strategy rather than significant cash positions.

The Co-Investment and Secondary Advantage

One of the key benefits of our evergreen structure is the flexibility it provides through co-investments and secondary opportunities, both of which significantly impact our quarterly subscription capacity decisions.

Co-Investment Flexibility: Fusion Fund typically allocates 30-40% of its capital to direct co-investments alongside our Mercury, Genesis, and Saturn funds. This creates several advantages:

Deployment Flexibility: Co-investments can be upsized or downsized based on available cash levels, providing natural capacity management tools.

Enhanced Returns: Unlike the underlying funds, co-investments don't carry performance fees, enhancing returns for Fusion investors.

Opportunistic Allocation: Co-investment opportunities arise based on deal timing across our three fund strategies, creating additional deployment channels when subscription capacity allows.

Secondary Market Access: Fusion can also participate in Hg secondary transactions, providing another avenue for capital deployment and liquidity management.

This multi-faceted approach means our quarterly subscription decisions must account for expected co-investment opportunities across all three fund strategies, potential secondary market transactions, and cash management requirements to ensure availability for time-sensitive opportunities.

The Balancing Act: Demand vs. Deal Flow

Managing this balance requires sophisticated planning that considers multiple factors:

Demand-Side Factors:

• Investor Type Mix

  Balancing family offices, foundations, and other wealth clients

• Market Conditions

  During volatile periods, alternative investments often see increased demand

• Referral Networks

  Our software founder network continues to drive organic demand

Supply-Side Constraints:

• Pipeline Velocity

  Software deals have specific timing cycles that can't be rushed

• Due Diligence Capacity

  Our investment team can only properly evaluate a finite number of opportunities

• Co-Investment Timing

  Direct co-investment opportunities alongside our funds depend on deal timing and allocation availability

• Secondary Opportunities

  Hg secondary transactions provide additional deployment flexibility but occur on an opportunistic basis

The Strategic Benefits

While capping subscriptions might seem counterintuitive in an asset-gathering world, it creates several strategic advantages:

Performance Protection: By avoiding over-capitalization, we maintain the ability to be selective with investments, protecting long-term performance.

Investor Alignment: Investors appreciate that we prioritize their returns over our fee income, creating stronger long-term relationships.

Brand Differentiation: In a market where many funds accept unlimited capital, disciplined capacity management reinforces our specialized, performance-focused approach.

Quality Partnerships: Rather than working with unlimited distribution partners, we're selective about relationships that align with our capacity constraints and investor profile.

The Bottom Line

Capping subscriptions in an evergreen fund isn't just an operational decision, it's a reflection of investment philosophy. In an industry where asset gathering often takes precedence, we believe that maintaining investment discipline and protecting performance creates more sustainable long-term value.

For wealth advisors and family offices, this approach means that while immediate access might not always be available, the capacity constraints help protect the very investment characteristics that make the strategy attractive in the first place.

The challenge of managing excess demand is certainly a good problem to have. But how we handle that challenge ultimately determines whether we can continue delivering the specialized software exposure that defines our approach.

This material is for informational purposes only and should not be construed as investment advice. Past performance does not guarantee future results. All investments carry risk of capital loss. Fund capacity limitations may affect investor access and timing.