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.
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