Long-term funds – vehicles with a life longer than the traditional 10 years – increased in popularity this year with the arrival of several funds dedicated to the strategy.
Funds that held their final close include Bain Capital spin-out Core Equity Holdings, which raised €1 billion for its debut vehicle in September, and Cove Hill Partners, also founded by a Bain alumnus, which held the final close on its debut vehicle in September on $1 billion.
Proponents of the strategy argue the traditional private equity model is an outdated piece of technology that needs a revamp. By holding assets for longer, these managers believe they can gain deeper expertise in the industries they focus on without having to sacrifice returns, as they would in an infrastructure-like fund.
“Why would you sell a business that you know, a team that you like, a strategy that you’ve helped devise, [when] you keep generating the sorts of returns you want to generate?” Core Equity partner Alain Stoessel told Private Equity International in June. To him, managers selling assets and finding other targets to acquire that they know little about is simply to create liquidity for fundraising.
Other private equity firms are getting in on the long-term action in different ways. KKR is seeking to acquire as many as 12 long-term core investments from its balance sheet over the next five years, Scott Nuttall, the firm’s co-president and co-chief operating officer, said on a second quarter earnings call in July. The deals, which could include credit and infrastructure and would focus on more predictable targets with recurring revenue and no exposure to commodities, will be made from separate accounts alongside KKR’s balance sheet.
KKR completed the first of these with the $4.3 billion acquisition of US insurance brokerage and consulting firm USI Insurance Services alongside CDPQ in March.
Blackstone, which raised $5 billion for its Core Equity Partners long-term vehicle, made investments from the fund this year including music rights organisation SESAC Holdings in January.
Carlyle was also active during the year, making at least two investments from its $3.6 billion Carlyle Global Partners vehicle. Launched in 2015, the fund focuses on long-dated investments in North America and Europe and holds six assets including the March acquisition of ice products distributor Arctic Glacier and the July purchase of basin energy assets Hilcorp San Juan.
The long-term strategy is not without its critics. They argue that private equity involves creating value in a business with a view to selling it within three to five years and that the dynamics in a long-term fund run counter to that. Shorter holding periods also force sponsors to be more focused. Asset concentration can also be an issue, with a 15- to 17-year fund that invests in between three and five assets under more pressure to acquire and build the right assets than a 10-year fund that is diversified with one dozen or more investments.
Whether its critics or proponents are proven right, long-term funds proved popular among a certain set of institutional investors this year. Both Core Equity and Cove Hill count endowments, foundations and family offices among their LP base – sophisticated, long-term-minded institutional investors.
With maintaining private equity target allocations a concern on many LPs’ minds, not having to worry about finding the next manager in which to park capital can be an attractive proposition. Long-term funds are likely to continue as a trend well into the new year.
– Marine Cole and Alex Lynn contributed to this report.