By Dawn Lim and Laura Cooper

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 funds.

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 Group, 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 insurance companies.

Fewer flubs

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.

‘Holy Grail’

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.

Too much ‘flipping’

The shift away from traditional 10-year funds shows large institutions are rethinking their relationships with Wall Street.

“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 to Dealogic.

“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.

Staying put

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 and

Appeared in the June 20, 2018, print edition as 'Private-Equity Firms Think Longer Term.'