Long-hold private equity vehicles could significantly outperform traditional fund strategies, according to research from Bain & Company.
The consulting firm’s Global Private Equity Report 2018 found long-hold funds could generate double the post-tax investment multiple of typical buyout funds over a 24-year period. The report modelled costs and returns for a theoretical long-hold fund selling an investment at the end of that against a buyout fund selling four successive companies over the same length of time.
Long-hold vehicles benefit from lower transaction costs due to reduced deal activity, deferred taxation of capital gains and greater flexibility around the timing of an exit, which all help drive potential outperformance, the report noted. Targets often boast strong management, healthy free cashflow and tap into demographic tailwinds, such as an aging population.
A number of blue-chip firms have already launched long-hold vehicles. CVC Capital Partners is seeking €4 billion for its second strategic opportunities fund and invested in UK roadside assistance company RAC and Spanish oil transportation firm CLH from its €3.9 billion 2016-vintage predecessor.
KKR announced in February it had amassed $8 billion for its Core Investment strategy, which will target deals with an expected hold period of 15 years or more and does not have recycling provisions. Apollo Global Management also intends to launch a long-term equity and credit vehicle, while BlackRock is reportedly planning a $10 billion perpetual capital fund targeting minority stakes in family-owned business and corporate spin-outs.
Firms planning a long-hold private equity strategy can also use methods outside the traditional fund structure. London-based private holding company Cranemere welcomes investors as shareholders, rather than LPs, meaning there is no capital gains tax as cash generated by a portfolio company goes straight to the firm, Bain’s report noted. The holding company also has the ability to adapt its strategy as necessary due to a lack of a traditional investment mandate.