Blackstone Group LP has raised $4.8 billion to date for its long-term fund, according to the firm’s second-quarter earnings report, backed by heavyweight investors including Canada Pension Plan Investment Board, Korea’s National Pension Service, New York State Common Retirement Fund, and North Carolina Retirement Systems. In January the firm bought music-rights company Sesac Holdings Inc. for the 20-year fund.
European firm CVC Capital Partners closed a $4.4 billion pool for a long-term strategy, with backing from the firm’s part owner, the Government of Singapore Investment Corp.
KKR & Co., whose co-founder Henry Kravis in 2009 described Berkshire Hathaway Inc.’s style as “the perfect private equity model,” is also dabbling. It formed a partnership with Canadian pension fund giant Caisse de Depot et Placement du Quebec to make longer-duration investments. They paired this year to buy USI Insurance Services LLC for about $2 billion, for example, their first long-hold deal together. But KKR has yet to raise a fund for the strategy.
The field is largely limited to these big players, the industry’s precious few household names with a track record and bench of players deep enough for investors to trust them with their cash for two decades. “I think it will be a very limited number of people who can raise a fund of this duration,” says Jim Treanor, head of North America advisory services for Pavilion Alternatives Group LLC.
Aside from the risks of being locked to a manager long-term, being held by a private equity firm for an extended period could also affect the portfolio company’s performance and investor returns, according to Treanor. “It’s hard for one GP to be able to continually add value at every stage of that development of the company,” he says. “It’s going to be the bigger GPs that have bigger networks and a variety of value-add” tools.
Not all investors are suited to the long-duration model, either. While some massive limited partners, such as Asian and Middle Eastern sovereign wealth funds, can afford to lock up billions of capital for two decades, few investors have that luxury because they need liquidity, says David Fann, chief executive officer of TorreyCove Capital Partners LLC.
And at a time when many investors like U.S. public pension systems are struggling to meet their expected rates of return, accepting lower returns—even in return for long duration and lower fees—isn’t appealing for everyone, he says.
It might not be for everyone yet, but Carlyle’s Zachem sees more managers and limited partners trying to embrace the long-duration fund once its current crop of pioneers have proved the model.
“There’s an element of ‘that sounds interesting, that sounds attractive,’ but until you can see it and touch it and feel it, it’s hard,” he says, adding that getting any new kind of fund off the ground is tough. “There’s a natural ‘fund one’ headwind that anyone faces. We have, as well.”
In other words, it will take time.