The long, long hold

Silver Lake’s launch of a multi-decade strategy is the latest example of a private equity industry grappling with how to hold on to assets outside of a traditional 10-year fund model.

A trend that has been percolating for several years in private equity exploded to the surface this week in a partnership between sovereign fund Mubadala and Silver Lake.

Mubadala agreed to invest $2 billion with Silver Lake with a deployment horizon of 25 years. The capital will be invested across structures, geographies and industries in both early to later stage businesses.

At the heart of the partnership is the idea of holding growing businesses for the “long term.” The partnership highlights the firm’s “long-term commitment to our portfolio companies,” Silver Lake’s co-CEOs Egon Durban and Greg Mondre said in a statement.

This trend, which we’ve tracked all year starting with our January cover story, is nothing short of a fundamental rethinking of how private equity works. It flies against the perception of private equity firms as quick strip and flip shops.

Many firms are looking for ways to hold certain assets for longer than allowed under the traditional private equity structure, which is generally a 10-year term, with five years to deploy capital and five years to sell. The structure imposes a certain discipline on GPs to identify companies they can grow and prep for sales in three to five years, with holds any longer gradually eroding value creation plans. LPs like the fairly predictable pace of capital draws and distributions that come with traditional funds.

However, in more recent years, GPs and their limited partners have been in situations where they have reluctantly sold companies they wished they could hold longer. These companies had more growth ahead and the GP had to give up riding that growth because of the structure of their funds. The firms grew the company, helped build the business plan, potentially installed management, and because of fund structure, had to leave it all behind (with hopefully a nice return).

It’s become apparent that certain businesses just don’t fit that traditional timetable. But GPs being GPs, they are finding ways to adjust and adapt.

To get around this, firms use a three-pronged approach: one, they raise funds that have longer terms than 10 years, which has been the case with offerings from Carlyle Group, Blackstone Group and Altas Partners. Firms are also creating “perpetual” pools of capital that never close and periodically welcome fresh capital from investors. Vista Equity has a product like this.

Two, GPs are increasingly using the secondary market to move assets out of older funds and into continuation pools that give them more time to manage the assets. The trend in secondaries over the past couple years has been well-established GPs running secondary deals — a strategy once reserved for challenged firms unlikely to raise new funds. As firms realize some businesses need more time to execute their business plans, GP-led secondaries deals have become a routine tool for GPs.

Third, many GPs are achieving longer-term holds through routine M&A by holding minority stakes on companies they are selling. In this way they are able to deliver proceeds to LPs, and still continue to ride growth. A few GPs like TA Associates and Sequoia have raised funds that will invest in the firms’ own portfolio companies. Once GPs achieved this through cross-fund investing, but LPs tend to push back against the new fund buying assets out of the old fund because of the potential for conflict.

Now we see Silver Lake and Mubadala establishing what could be a generational partnership for maximum flexibility to grow technology-focused businesses. Long-term holds is not simply a function of a certain market … it’s a different philosophy on what it means to own and manage a private business. And it’s changed the way many GPs, and LPs, approach the market. We expect to see a lot more of this sort of thing, and we’ll be right here on the front lines tracking the growth of this trend.