Private Equity Wants Your Money for Longer
Private equity firms have had no trouble attracting investor dollars. Now there's a new priority: Convincing investors to lock those dollars up for longer.
KKR & Co.'s third-quarter results, released Thursday, aren't anything to write home about (profit slid by almost half and economic net income, a closely watched metric, fell short of Wall Street's expectations). But one intriguing revelation is that during the quarter, the alternative asset manager closed on two long-term strategic investor partnerships totaling $7 billion. 1
Unlike standard private equity funds with decade-long lives, the arrangements are designed to be stickier, with durations of more than 20 years. And while it represents just a small fraction of KKR's $114 billion in fee-paying assets under management, or $153 billion all up, the $7 billion -- combined with its roughly $6 billion in existing permanent capital -- exemplifies a shift not just at KKR, but within the broader industry as well. 2
These strategic investments are slightly different from permanent capital, which can generally be invested in perpetuity, but they share the same long-term characteristics. Both are already increasing in popularity across these Wall Street firms and in Europe (Carlyle Group LP and CVC Capital Partners Ltd. have already raised permanent capital funds), and that trend isn't set to abate anytime soon.
Just last week, Blackstone Group LP's chief financial officer Michael Chae explained why the New York firm -- which is setting up its infrastructure fund as a permanent capital vehicle -- favors funds with longer durations over traditional funds. The first benefit? Slashing time on the grueling fundraising circuit -- what Chae described as "bit of a treadmill." For those unfamiliar, it involves executives being dragged away from dealmaking and investment oversight to press palms with prospective investors across the world.
Another key advantage of these structures is the flexibility it provides firms like KKR and Blackstone to invest in a different set of companies that may take a longer time to deliver healthy returns. What's more, without the pressure to turning a quick profit, they have the ability to simply hang onto solidly performing investments for longer. As Blackstone's Chae said, "If you've got a great asset that has a lot of future potential, why sell it, and why not let it work for investors longer?"
Longer-term capital also lends more predictability to the fee components of their quarterly earnings, which would be welcomed by their public shareholders and could lift the valuations of their stock.
Institutional investors -- mostly pension funds, sovereign-wealth funds, endowments and family offices -- have reasons to favor these longer-duration funds, too. A reward for their participation typically involves a break on fees, and they no longer have to deal with the headache of reallocating the millions or billions of dollars they are handed back from funds. 3
Of course, not every investor will be rushing to lock up their capital for the long haul. Many need to satisfy various obligations if their cash pile runs low or equities, debt and other investments falter.
But the hassle of the fundraising cycle is a treadmill they'll also seek to avoid where possible.
One of these deep-pocketed investors is New York City's pensions system, according to Bloomberg News.
The $7 billion and $6 billion figures are calculated using KKR's percentage breakdown of fee-paying assets under management. The firm may have more long-duration capital that is not yet earning fees.
Often, such cash is handed back to the same firms for successor funds
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