Private-Equity Firms Create Funds That Last -- WSJ
January 02 2019 - 3:02AM
Dow Jones News
By Miriam Gottfried
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 2, 2019).
Private-equity firms, known for buying and selling companies,
would like to do more buying and holding.
Blackstone Group LP, Carlyle Group LP, CVC Capital Partners and
others over the past couple of years have launched funds that can
own companies for 15 years or longer. Carlyle and CVC are back in
the market raising new long-term buyout funds, and others are
joining the fray. KKR & Co. said it has raised $5.5 billion
from a few large investors, which it is pairing with $3 billion
from its own balance sheet to do longer-term deals.
Meanwhile, firms such as investment giant BlackRock Inc., which
doesn't have a significant private-equity business, have eschewed
the traditional fund structure altogether in launching vehicles
that can hold assets indefinitely.
A typical buyout fund owns companies -- acquired largely with
borrowed money -- for around five years. Managers will usually
tinker with a company's operations or structure with the goal of
selling it or taking it public at a profit. Most investments are
supposed to be unloaded by the end of a fund's 10-year
lifespan.
Private-equity executives say the condensed timeline can force
them to sell at the wrong time, say, when a company is down on its
luck or before it has had time to achieve its full potential. It
also helps explain why private-equity firms so often unload assets
to rival firms, which continue to reap returns from them. These
so-called secondary buyouts incur transaction costs that irk
investors, particularly those backing both the buyer and the
seller.
The moves toward longer-term capital are connected to a broader
shift in favor of so-called permanent or perpetual capital -- pools
of money that don't need to be constantly refreshed, at great
effort and expense. These can come in different guises, including
business-development companies, which lend to midsize companies;
insurance platforms such as Apollo Global Management LLC's Athene
Holdings Ltd.; private real-estate investment trusts; and long-term
real estate, infrastructure and private-equity funds.
Blackstone, the biggest private-equity firm with $456.7 billion
of assets, said in September it had $64 billion in perpetual
vehicles or long-term funds with an average of 12 years remaining,
up more than sevenfold over the past five years. That is thanks
largely to a sharp increase in its real-estate assets under
management. Such vehicles were responsible for 90% of Blackstone's
revenue over the prior 12 months.
For publicly traded investment firms, such capital is prized
because it gives shareholders more visibility into future
management fees, which are paid on money invested. The market gives
more weight to management fees than to less predictable profits on
investments.
Cranemere Group Ltd. operates as a private holding company that
can own businesses for as long as it wants. Its founder and
chairman, Vincent Mai, formerly served as chief executive of
private-equity firm AEA Investors LP. Mr. Mai was sometimes
frustrated by being forced to sell the best companies in the
portfolio and wanted a structure that allowed him to retain them,
according to Cranemere Chief Executive Jeffrey Zients.
"There is excessive short-termism in our economy," Mr. Zients
said in an interview. "That creates opportunity for long-term
owners to make disciplined investments in areas like R&D that
make sense and have strong returns when you plan to hold companies,
not sell them."
Long-term vehicles tend to buy businesses that are stable with
steady cash flows and aren't fixer-uppers. That means they often
cost more. As a result, the vehicles typically have annualized
return expectations of 12% to 15%, versus the 20%-plus touted by
traditional buyout funds.
Skeptical investors say long-term funds being launched by
multistrategy asset managers are just a way to continue to grow
their fee streams and that traditional funds already offer the
ability for investors to approve extensions beyond the 10-year time
horizon. They also question whether firms can predict which
companies will be worth owning for longer.
"There is a healthy discipline in having to buy and sell at the
right point in the cycle," said Brian Rodde, who oversees the
private-equity portfolio at Makena Capital Management, an investor
in buyout funds.
Sponsors of the new funds cite the appeal of the long-term
nature of the capital to family businesses, which may otherwise be
reluctant to sell to private equity. Last year, CVC invested in
family-owned Asplundh Tree Expert LLC out of its long-term fund.
The company, which trims trees alongside rail and power lines, had
been coveted by private-equity firms for years but the family was
finally encouraged to sell in part because CVC would be sticking
around for longer, according to people familiar with the deal.
Long-term ownership also appeals to large investors such as
insurance companies and sovereign-wealth funds, which have billions
to put to work and long-dated liabilities, and family offices,
which, unlike pension funds, must pay capital-gains taxes and may
not need liquidity; indeed, they may not want to have to find new
places to park distributed cash.
Just by eliminating costs incurred from buying and selling
companies, a theoretical long-hold fund selling an investment after
24 years could outperform a typical buyout fund selling four
successive companies by almost two times on an after-tax basis,
according to an analysis by consulting firm Bain & Co.
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
(END) Dow Jones Newswires
January 02, 2019 02:47 ET (07:47 GMT)
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