WALL STREET JOURNAL.
Private-Equity Firms Rethink Their Short-Term Focus
Some look to stay
invested in companies for unlimited periods
Big investors like California
Public Employees’ Retirement System are helping drive the trend
to longer-term investments. Above, Calpers Chief Investment
Officer Ted Eliopoulos. PHOTO: RYAN ANGEL MEZA FOR THE WALL
Dawn Lim and
June 19, 2018 10:27 p.m ET
Private-equity firms have
long hewed to a certain model: They raise investor money to buy
businesses, then exit their bets in a decade or so.
Now, some private-equity firms want
to stay invested in companies longer, perhaps even forever, driving a broad push
by the industry into longer-life pools, and what some call permanent-capital
BlackRock Inc., for
instance, is seeking more than $10 billion for a new private-equity pool that
has no deadline for exiting the investments it makes. Other companies, including
Altas Partners, Blackstone
CVC Capital Partners & Co. and Vista Equity Partners, collectively have raised
or are still looking to raise billions of dollars for pools designed to last
longer than the typical 10- to 12-year funds.
KKR has amassed $9.5 billion to hold
companies for the long term, and well beyond the life of traditional
private-equity funds. KKR is currently investing $8.5 billion of that capital,
which is the largest pool of its kind and is backed by $3 billion of the
private-equity firm’s own balance sheet. The firm raised the remainder from
institutions, with a large amount coming from sovereign-wealth funds and
There are clear incentives to a
long-term strategy for both the firms and the investors. For one, firms that
keep investments private for longer can lower the risk of flubbed initial public
offerings. There is also appetite among some large investors—sovereign-wealth
funds in particular—for more investment strategies that match their own
long-term strategic horizons, which often extend for decades or longer.
To keep these long-term investors
satisfied, firms managing permanent-capital funds typically purchase businesses
with recurring revenue—examples could include a dental-services chain with
regular customers or a software company with licensing agreements—that can flow
back to the funds’ investors as fee income for decades.
One technology banker has called
permanent-capital funds the “Holy Grail for private-equity firms” because they
help the firms compete with corporate buyers, which can essentially hold the
companies that they purchase indefinitely. Private-equity funds, in contrast,
face pressure to sell companies or take them public after a few years.
The trend to long-term
private-equity investments could have repercussions in broader capital markets.
A proliferation of long-life funds could further shrink the U.S. public market
as more companies can readily tap the private markets for money and delay plans
for initial public offerings. About 200 companies went public in the U.S. last
year, down from more than 800 in 1996, according to research firm Dealogic.
Another incentive of long-term deals
for private-equity firms is they may help the firms avoid the distraction of
having to market new funds every three or four years.
But the rise of funds built for the
very long run also raises the risk that private-equity managers become less
motivated to generate the outsize returns that have characterized the asset
class over the past decade or more. Indeed, it could become challenging for
firms to incentivize their deal makers to stick around when the investments they
make are expected to last for decades.
The shift away from traditional
10-year funds shows large institutions are rethinking their relationships with
“Investors with a long-term horizon
don’t see the point of investing in private-equity funds to hold companies for
just four or five years,” says Ludovic Phalippou, an associate professor of
finance at the University of Oxford’s Saïd Business School.
These investors want to avoid having
their managers become forced sellers of companies. Instead, they are warming up
to a view that institutions should back companies as long as possible to
maximize their profits.
Some big investors say they are
tired of finding themselves indirectly on both sides of a deal as private-equity
firms increasingly trade companies among themselves. The volume of such deals
globally rose to $93.7 billion in 2017, the highest level since 2007, according
“We’ve seen our own investments flip
four times through our portfolio from one manager to the next manager to the
next manager,” Jerry Albright, the investment chief of the Teacher Retirement
System of Texas, said at a pension meeting earlier this year. “In between those
flips, there’s fees.”
California Public Employees’
Retirement System, for its part, is exploring plans to set up
multibillion-dollar funds to buy and hold private companies for extended
periods. The idea would be to hold companies “forever rather than being forced
to sell them at an arbitrary time point,” Chief Investment Officer Ted
Eliopoulos told The Wall Street Journal in May.
As it gets harder for investors to
find bargains when assets are increasingly overpriced, staying put in companies
may be more attractive than having to put cash to work.
For investors, one of the biggest
draws of a private-equity fund with an exceptionally long outlook is the lack of
more attractive investment options in a low-yield environment.
Institutions that have backed this
strategy “prefer to keep their capital invested for longer, rather than having
it returned quickly only to have to go out again to find opportunities to put it
to work,” says Webster Chua, KKR’s head of corporate development.
Ms. Cooper and Ms. Lim are Wall Street Journal reporters in New
York. Email them firstname.lastname@example.org and email@example.com.
Appeared in the June 20, 2018, print edition as
'Private-Equity Firms Think Longer Term.'