January 26, 2017

Private Equity: Fund Lifecycles Are Lengthening

This recent MergerMarket study reviews private equity fund lifecycles & reports that they’ve grown longer in recent years:

As a rule of thumb, PE funds aim to return all of their investors’ capital within 10 years — using approximately five years to invest and five years to harvest those deals, with two or more years of extensions written into the Limited Partner Agreement in order to realize value in underlying portfolio companies if necessary. Our findings show that fund life spans have increased beyond 10 years for the majority of GPs.

The study found that 66% of the fund GPs surveyed said that their most recent fund took between 11 and 14 years from initial investment to being completely wound up. Here are some of the study’s other key findings:

– 58% of respondents say the PE fundraising period for the current fund was longer than the preceding one, with 16% describing it as having increased significantly.

– 56% of respondents say that the timeframe from investment to disposition has increased over the past five years, with 12% saying it has increased significantly. This means that LPs’ called capital is illiquid for longer, making it unavailable for other general partners (GPs) who are in fundraising mode.

– Dry powder is at an all-time high, and yet PE firms are also setting records for additional fundraising. Two-thirds of respondents believe that the proliferation of PE firms and funds is behind this trend, meaning that managers will have to compete hard to raise new capital.

The study suggests that investors’ decisions to concentrate their capital with fewer managers for primary commitments may be a big part of the reason for the increase in time spent fundraising. Multiple factors have contributed to the lengthening of the investment period – including declines in asset values following the financial crisis and the length of time required for those values to recover, and the effects of increased competition for investments & record purchase price multiples for private companies.

John Jenkins