Fundraising: Long-term fund structures

In March we learned that Blackstone had so far raised $3.72 billion for its Tactical Opportunities Fund II. Blackstone launched its tactical opportunities platform in 2012 to capitalise on global investment opportunities that are time-sensitive, complex, or in dislocated markets, according to the firm’s website. The funds invest in real assets, private equity, credit, real estate and hedge funds through separately managed accounts of LPs, with a flexible investment holding period.

It represents part of a growing trend for mega firms to market vehicles that break from the typical 10-year fund structures, offering investors a longer time horizon in exchange for lower risk, lower fees and lower returns. In February David Rubenstein updated the market on The Carlyle Group’s progress raising its long-term vehicle, Carlyle Global Partners. The firm has already raised $3 billion from large limited partners with additional capital likely coming this year, he said. 

Meanwhile, CVC Capital Partners has already started to deploy its $4.5 billion Strategic Opportunities Fund, which is expected to hold businesses for between eight and 12 years and target mid-teen returns.

The rationale for launching such funds is clear: investors want them. A pension fund may have an investment horizon of 20 years. For an endowment or sovereign wealth fund, it may be 100 years. A longer-life vehicle, therefore, makes clear sense.

For managers, a longer investment period allows them to pursue opportunities that would otherwise have to be passed over, such as large established companies that have minimal need for operational improvement.

While these longer-term funds may address some limitations LPs and GPs have experienced with private equity, they also bring a new set of challenges. There is a need to carefully manage the potential conflict of interest that may arise between different teams within a firm, with the long-term investment team competing with their buyout colleagues when looking at investment opportunities. There is also the challenge of attracting and keeping an investment team when carry is potentially lower and slower to come.