Median PE Fund Life Hits Record 13.2 Years
According to a Palico analysis of funds dissolved in 2014, the lifespan of the median private fund – across all sectors and geographies – has reached an unprecedented 13.2 years, up from 11.5 years in 2008. Only some 12 percent of funds liquidated in 2014 were wound up by their 10th year, which is the typical deadline for returning capital from classic, commingled PE vehicles.
Longer Lifespans Mean Lower Annual Returns and Less Liquidity for Investors
The most fundamental disadvantage for investors in funds with longer-than-expected lifespans are lower-than-expected annual returns. Long-life funds can also create serious liquidity issues for investors.
Today’s Long Lifespans Trace to the Dot-Com Bubble and the Financial Crisis
The drop in asset values and the deal draughts following the dot-com bubble in 2000 and the financial crisis in 2008 help explain today’s longer-than-expected lifespan for private equity funds. That said, typical fund life would be even longer without the good exit environment of the past couple of years. High asset prices, driven by exceptionally low interest rates and widely available credit, have allowed private equity funds to realize a large volume of investments, but they’ve also made it more expensive to acquire companies.
Exceptional Liquidity and Low Interest Rates: A Double-Edged Sword
Ironically, the factors that have helped mitigate the problem of longer PE fund lifespans are likely to make average maturities even longer going forward. The cheap credit and low interest rates supporting high asset prices and exit volumes mean it’s harder than ever for the typical private equity fund to deploy capital. For example, through March 11 there have only been $19.9 billion worth of private equity-backed acquisitions in 2015 – down 53 percent from last year and the lowest recorded amount since 2002, when PE was less than a third of its present size. Without the benefit of lower asset prices, it will take the typical private fund longer to find suitable targets, build value and realize investments. Long and very possibly lengthening fund life is likely to be with us for some time, given slow growth and the exceptionally accommodative monetary policies of the world’s central banks.
Minimizing the Negative Impact of Longer Fund Life
In addition to considering the growing number of private equity funds that explicitly target longer maturities, and which compensate investors for lower expected annual returns with lower annual fees, investors can minimize the impact of lengthening fund life by backing either managers with exceptional operational expertise, or those in private equity niches with little competition. Managers with a demonstrable edge are more likely to build value relatively quickly and easily in today’s competitive marketplace for portfolio assets.