LPs warm to permanent-capital vehicles, despite some resistance from pensions

Permanent-capital vehicles are gaining traction with limited partners.

Public Pension Capital, founded by former KKR Partners Perry Golkin and Mike Tokarz, had raised at least $786 million for its debut evergreen fund by April.

Backers of the fund include San Diego County Employees’ Retirement Association, which recently doubled its commitment to $100 million. No target was listed in its filing with the SEC.

General Atlantic has long-term funds, and its fourth fund has raised more than $987 million from 141 investors as of February 2018, according to its SEC filing.

More than half its capital comes from family offices, and institutional investors include Stanford Management Co, Peter G. Peterson Foundation and Oregon Investment Council, according to Oregon pension documents.

General Atlantic funds its investments through staggered managed accounts and permanent-capital commitments, Bloomberg reported in April 2018.

Likewise, Golden Gate Capital has an evergreen fund. The firm has more than $15 billion in committed capital and investors include endowments, non-profit foundations and sovereign-wealth funds.

The private equity firm has more than 40 investments across software semiconductors and IT hardware, consumer, industrials, IT and business services and financial services.

Last year, New York City Retirement Systems committed to longer-duration funds of KKR, while California Public Employees’ Retirement System committed to CVC Capital’s long-term fund, documents show.

All told, Buyouts has identified about 10 long-dated funds that have closed or are in market over the past two years. Firms with such funds include KKR, Vista Equity Partners, CVC Capital Partners and Atlas Partners, Buyouts reported.

During a keynote address late last month at Buyouts Insider’s PartnerConnect Midwest conference in Chicago, Tony James, executive vice chairman of Blackstone Group, said public pensions are well served by long-dated funds.

“Twenty-five years from now you will be almost two times richer earning 12 percent in a permanent-capital kind of vehicle than you would by doing five 20-percent buyouts funds,” said James, whose firm has introduced permanent-capital funds in real estate and infrastructure.

Christopher Schelling, director of private equity at Texas Municipal Retirement System, is also a fan.

Because they hold companies for the long term, permanent-capital vehicles can reduce transaction costs and managerial fees, Schelling said, adding that he feels the strategy is actually closer to the PE ideal.

“The [current] private equity model is not really long-term when you think about it,” he said, pointing to the typical three-to-five-year holding period of many firms.

Joe Bryant, investment director at UCLA Investment Co, said UCLA is reviewing a couple of permanent-capital vehicles.

“We think about this often as the private equity harvest period may compel sale of a high-quality asset that an investor like ourselves, with infinite investment horizon, would otherwise prefer to continue holding,” Bryan said.

All that said, some pockets of resistance to permanent-capital vehicles have appeared among public pensions. “Unlike family offices, pension funds have many stakeholders they are answerable to; a new product requires a lot of heavy lifting,” Schelling said.

Blackstone’s James also suggested that the compensation plans of some public-pension investment officers, based in part on the annual IRR of the private equity portfolio, may thwart their adoption.

“Sovereign-wealth funds get it. I think family offices get it, [but] pension funds don’t because those people get their bonuses on an annual basis,” James said.