Going long

Institutional investors want to put capital to work for more than 10 years at a time. Are private equity firms the right organisations to do it?

Participants in private equity take pride in its long-term investment horizon.

While other financial investors might trade in and out of a position in seconds, private equity owners will be there for years after their initial investment. A 'quick flip' is normally measured in years. It is a partnership in the true sense of the word, albeit one with a finite lifespan.

But as a delegate at PEI's Responsible Investment Forum New York reminded us earlier this month, everything is relative. Private equity is not a long-term investment model, she said, to murmurs of dissent from the crowd. A hold of five years is medium term compared with some ownership models.

As if to illustrate this, the arrival of SoftBank Group into the asset class looks like it will put a different perspective on the industry's time horizons.

SoftBank has a “rich history of investing,” and operates over “very long timescales,” said Jonathan Bullock, its international chief operating officer, at an event in London this week. Bullock could not specifically talk about the firm's $100 billion Vision Fund, but said if you understand a little about the company, then you understand a bit about the fund. SoftBank holds other companies' shares for 13.5 years on average, according to Nikkei's Asian Review. Its leader, Masayoshi Son, has a stated aim to build a group that will last 300 years, according to the same publication.

Now that's long term.

This is not a new concept to the asset class's stalwarts. “Limited partners are looking to put money to work for longer periods of time and get compounded returns,” said Mike Arpey, head of investor relations at Carlyle, on one of the firm's podcasts last week. “Being able to deploy capital, let it compound and deploy over time, that allows a wonderful asset liability match.”

The large firms have responded to this and set up limited partnerships that look very similar to traditional private equity vehicles, but with a longer than the typical 10 year term, sometimes double that.

Blackstone raised $5 billion for its Blackstone Core Equity Partners fund, which is reported to have a 20 year lifespan, last year and recently made its first investment in SESAC, a music royalties business. BCEP is invested by the same team that manages the firm's flagship private equity buyout fund, Joe Baratta, the firm's global head of private equity, recently explained to PEI. When the firm comes across a “quality” company with predictable cashflow that does not require much in the way of investment or margin improvement, it goes into the fund. “It's not like we're doing nothing, but it's not the heavy lifting that we do in most of our private equity deals,” Baratta said.

Carlyle and CVC Capital Partners have both raised and started to invest long-term funds. Vista Equity Partners, the technology specialist, has started planning for such a fund, although details remain scarce.

KKR recently made its first long-term investment using balance sheet capital, acquiring insurance company USI alongside CDPQ. The deal is the first in a partnership between the two investors to target lower-risk businesses with stable recurring revenue. KKR tends to seed strategies using its balance sheet capital, so don't be surprised if the firm starts raising its own version of the long-term fund.

Apollo Global Management, for its part, is bundling its long-term PE approach with other strategies that don't fit neatly into existing funds. It is currently seeking to raise $750 million for its Apollo Special Situations, which could invest in royalties, infrastructure and minority investments in addition to longer-dated private equity.
In a comment 12 months ago, we questioned what type of organisation would be best placed to manage such a pool of capital, given the lack of operational heavy lifting and assumption of lower, less volatile returns. The arrival of the SoftBank Vision Fund suggests there is not yet a definitive answer.

At the same time, we said long-term funds will complement, rather than replace, 10 year funds. One year on and we are even more confident of this assertion.