Average GPs managing teenage funds

The lifespan of the median private equity fund has now reached 13.2 years, according to new research from online private equity networking tool Palico. The new average is up from only 11.5 years in 2008.

The Palico data is based on the analysis of 200 private equity funds dissolved in 2014 from across all sectors and geographies. Most funds closed in 11 to 12 years or 13 to 14 years, while only 12 percent of funds analyzed wrapped by their tenth year, the typical deadline for returning capital in a traditional commingled vehicle. More than a quarter (26 percent) of the funds had a lifespan of more than 15 years.

While extended funds are now the norm for most GPs, they are still causing headaches for investors, Palico added. “The most fundamental disadvantage for investors in funds with longer-than-expected lifespans are lower-than-expected annual returns,” the report stated. “Long-life funds can also create serious liquidity issues for investors.”

Therefore, many LPs are taking a stand, notes Peter Laybourn, fund formation lawyer at Ropes and Gray. “Lately one of the things we’ve seen is that LPs are increasingly asking for control over extensions of fund terms,” he noted in a call with pfm.

In some new funds Laybourn has seen, the LPA will allow the GP to make an initial one-year extension, but the LP advisory committee (or in some cases, the entire LP pool) will need to approve any further extensions. Moreover, some LPs are asking for reduced management fees in those additional years.

Most of the LP concern comes from wanting more transparency on when their capital will be returned, as well as the fear that they might end up in a zombie fund.

Some firms like 3i are seeking a middle ground with their investors by not asking for full extensions on funds whose investment periods are near their end, but relying on a commonly negotiated provision which allows GPs to pursue deals already under advanced stages of due diligence. In that scenario, LPs can extend an investment period while simultaneously restricting deal flow to any range of criteria or specific transactions they find suitable.