Permanent Capital Redux
In my conversations with GPs and LPs alike, one theme that has consistently been emerging is a growing curiosity about permanent capital and the role that it can play in the private equity ecosystem. This is a topic that has periodically come into the forefront of conversation (including in a prescient previous 60 Seconds post…), but I thought it would be useful to quickly talk about what permanent capital vehicles today look like and the reasons behind their resurgence.
Of course, I should probably start by noting that permanent capital in private equity isn’t actually “permanent”. Rather, permanent capital vehicles are characterized by a 10 to 15-year hold period as opposed to your standard 5-year hold period. This type of long-dated structure allows for a better alignment of GP interests to more effectively drive value into a company, which attracts LPs from a return on capital perspective. LPs recognize that long-dated vehicles give GPs the freedom to make decisions that build value over the long-term – thus creating significant value for the LP while avoiding the reinvestment risk associated with shorter-dated vehicles.
All that said, however, one roadblock that turns most LPs off from this strategy is the blind pool risk over an extended timeframe. This setback has resulted in a key feature of permanent capital vehicles – they have a much shorter investment period. Typically, permanent capital vehicles in today’s market only have an 18-month investment period (usually with an option to extend for one year pending LPAC approval). This ensures that managers are highly incentivized and focused on finding an investment in the near-term. Secondly, as one would imagine, given the long vehicle life the management fee-basis is also typically only on the invested capital as opposed to the committed capital.
Many of the forward-thinking LPs that we speak to are growing increasingly excited about this fund structure for other reasons as well. Permanent capital vehicles allow GPs to take a longer-term strategic view for the company and implement initiatives that mature over a longer horizon. The lack of pressure to prioritize short-term decisions allows GPs to reap more value over time, which is attractive to LPs. Secondly, LPs recognize that longer-dated vehicles allow GPs to manage through an economic downturn and allow them to preserve their value over time, as opposed to typical private equity funds which are more exposed to the swings of the financial markets. Thus permanent capital is seen as an increasingly attractive way to hedge against the headwinds that the asset class will face at the end of the current bull market. Finally, given the short investment period, permanent capital vehicles usually have only one or two assets in them and allow GPs to be more thoughtful about the strategy they target and the investment criteria to evaluate deals.
Permanent capital vehicles are rapidly gaining traction in the notoriously conservative private equity LP community. We have a high conviction that the right GP could tap into the demand for this product and raise a dedicated fund that is structured as permanent capital. I would welcome the opportunity to learn about your thinking on this subject. Have a good weekend!
Sixpoint Partners, LLC, is a registered broker/dealer, member FINRA (http://www.finra.org) and SIPC (http://www.sipc.org). Sixpoint Partners Asia Limited is licensed by the Securities and Futures Commission (http://www.sfc.hk).