What does it mean to invest in a 10-year private equity fund? The fund buys a business at some point during its investment period, and at some point between then and the end of the fund’s 10-year life cycle, it sells that business on. But what if it bought a business in 2004 and year 10 of the fund happens to be 2007 or 2008? Why on earth would anyone want to sell a business into that kind of environment, unless they themselves were experiencing some kind of stress?
The traditional 10-year, fixed-life private equity fund does seem an odd beast for long-term institutional investors, which might have time horizons of the order of decades. As Mark Calnan, head of private equity at Towers Watson, points out, alternative models for private equity investment such as evergreen funds and managed accounts allow high-quality, cash-generative businesses to compound in investors’ portfolios for a much longer period of time. And this is all before we come to the growing incidence of ‘secondary buyouts’, where one private equity firm sells a business to another: if investors happen to be committed to both funds, they could be paying transaction fees to pass that business from one hand to the other.
“For a sub-set of assets, there is no reason why an institutional investor with a very long time horizon should really wish to sell them,” Calnan reasons.