LPs question fees on long-dated PE funds – AVCJ Forum

“A lot of companies are choosing to stay private. The incentive to go public was about access to capital, but now there is more access to capital in the private markets, why would you do it?” said Kate Misic, head of alternative investments at Telstra Super. “If you are a ‘core’ company you could say in a private equity for a long time. But how are these products set up and how are they going to charge?”

Several global private equity firms have launched vehicles for long-term investments. KKR, for example, raised $8.5 billion – including $3 billion in balance sheet capital – for its core investment strategy last year. Misic argued that core private equity should be priced like core real estate, which is already present in a different part of the Telstra Super portfolio. “It needs to look a little bit more like a listed equity-type fee if you are planning on not adding a lot of value,” she noted.

Canadian pension plan OPTrust has been underwriting assets for multiple decades in its infrastructure program. There is interest in a similar strategy for 10-20 year holds in private equity, but the group has struggled to find partners and ended up making most of these investments directly. Manager compensation is the primary obstacle.

“The issue we face is that to partner with a GP on a long-term basis it is hard to get the incentives right for them. They are happy to manage the asset for 10-15 years, and that’s fine on a management fee basis, but getting the carry to work on that basis is difficult. You probably have to pay some of it along the way, so it starts to look more like a short-term buyout fund,” said Stan Kolenc, a managing director with OPTrust.

Nevertheless, if companies continue to eschew public markets in favor of remaining under private ownership, an investment solution will have to be found. Lynn Baranski, CIO of BlackRock Private Equity Partners, cited the example of Asurion, a US cell phone insurance provider that has been held by private equity for more than a decade and rolled in and out of funds. There are recaps every couple of years that facilitate entries and exits. BlackRock made a 2.5x return in two years.

“I do think there is suspicion in the market as to why these vehicles are out there, but there are multiple companies that want to stay private and can provide long-term growth opportunities. Maybe it’s not a 20% return, but 14-15%, and maybe they have less leverage, not 5-6x but 3x, and maybe you can have a dividend policy,” Baranski said. “Some big family-owned companies might want to take some chips off the table but still own and manage their business.”

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• Topics
• Australasia
• LPs
• GPs
• Fundraising
• BlackRock
• AVCJ Events
• Telstra Super
• OPTrust