In November it emerged that The Carlyle Group is attempting to raise $5 billion for a private equity fund that can hold stakes in companies for as long as 20 years. According to a report by Bloomberg, the fund will make investments that don’t fit with the mandate of Carlyle’s $13 billion flagship buyout fund, which it raised last year. The vehicle would charge lower fees than the firm’s main fund, the report said. Co-founder David Rubenstein recently told a conference in New York: “After the great recession, a lot of investors said we want to bargain with you and said we would like to change the fee structure. We have changed.”
If successful, Carlyle (which declined to comment) would not be the only manager to have rethought the holding period. According to a market sources, CVC Capital Partners has already launched a new vehicle with a fund life of more than 14 years. Initially the fund, which is essentially a separate account, will have just one investor, although it may be extended to two or three. Similar to the Carlyle offering, the target return is understood to be lower than that of CVC’s existing buyout funds. A London-based spokesperson for the firm declined to comment.
Sovereign wealth funds are among the investors that might particularly welcome extended holding periods, market sources say. (People PEI has spoken to say the investor in the CVC structure is GIC.) Managers would be able to nurture their investments for longer, and time their exit decisions with greater flexibility than the standard 10-year fund structure typically allows for.
On the flipside, those who get invited to invest in a 20-year private equity fund may wish to consider some potential disadvantages. As lock-ups go, two decades is punchy, and whether any type of investor other than state funds can commit this far into the future is an interesting point. “If an LP is tied up for that long a period and the investments haven’t generated the return you are looking for, you may want an exit clause after 10 years if it hasn’t delivered,” John Gripton, managing director and head of global investment management private equity at Capital Dynamics, tells PEI.
Whether GP personnel can realistically wait for 20 years for carried interest to pay out is also a valid question. It is not unreasonable to assume that for a listed group like Carlyle, the primary attraction of a longer-dated fund is to lock down a fee income stream for many more years than it can with its conventional funds, rather than the prospect of earning an amount of carry in the distant future.
For the industry as a whole, perhaps the most pressing issue is how semi-permanent private equity funds with a lower hurdle rate – “core” private equity as they’ve been dubbed already – would change the dynamic when it comes to deal sourcing. Not only will Carlyle and CVC have to manage potential internal conflicts when selecting asset for their respective funds; but other, ‘short-only’ managers too will find themselves in competition with long-term patient rival bidders who enter the race as private equity, but with a markedly cheaper cost of capital.
There is no question that some investors will be tempted by the opportunity of entrusting large chunks of cash with a certain type of manager for the very long haul. Reassuringly for the rest of the industry however, the 20-year timeframe seems just too long a period for many investors to get comfortable.
Says Gripton: “Technology changes, consumer behaviour changes; 20 years is a long time to hold on to a company. [And w]hile there will be such opportunities, I think they will be limited compared to the PE universe as it stands today.”