Does Private Equity Really Have Long-Term Capital?
At a recent private equity conference, Stephen Schwarzman was asked why he thinks Blackstone’s share price has fared better than those of the investment banks (see Erin Griffith’s summary here). Schwarzman attributed Blackstone’s relative resilience to the fact that it has long-term capital and is not subject to the daily money-market pressures required to support trading operations. Indeed, a key benefit of the private equity business model is that you can afford to be patient with your portfolio companies. However, the long-term nature of private equity capital is often overstated. Private equity funds have commitments from investors to call capital as needed to make investments. Most funds hold just minimal cash or other assets that could be considered actual long-term capital. While skeptics may wish to dismiss as semantics the distinction between commitments for and actual long-term capital, in periods of economic stress this difference can be highly problematic. Individual investors are often the first to default on capital calls. In the Internet boom, many of the founders and early employees of recently IPOed startups made commitments to venture capital funds with ten-year partnerships. When the market value of their stock options collapsed, many of these investors were unable to meet their capital calls—so much for long-term capital.
