Private equity's life expectancy increases

Private equity funds are taking longer to return capital to their investors, meaning profits are spread over a longer period and annual returns are lower.

According to Palico, an online private equity marketplace, the lifespan of the median fund dissolved in 2014 was 13.2 years, up from 11.5 years in 2008. This trend is predicted to continue as more money is allocated to private equity, making it harder to find competitively priced deals.

"Ten years used to be the norm," said Antoine Drean, founder of Palico. "In most people's minds, investors had five years to deploy capital and five years to divest."

A typical private equity fund would deploy all of its capital by year five, expect to have created most of its potential value by year nine or 10, and then spend the remaining time winding up the residual value. A paucity of deals in the early years, or a challenging landscape for exits in the later years, can slow down this progress.

With funds holding the companies they buy for longer, even the positive exit environment is unlikely to push the lifespan of funds down in years to come. The average holding period is now almost six years, almost double the three years typical in 2007.

"The secondary market is the only way out for investors," said Mr Palico. Investors anxious to get their money back more quickly can sell their stakes to specialist vehicles that buy up residual private equity funds.

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Actively managing a fund of private equity funds portfolio is one way to deal with unwanted fund longevity, said Helen Steers, who leads the European primary investment platform at Pantheon, a fund of funds manager overseeing $31.4bn.

She said that investors anxious to avoid funds that outlive their expected lifespan should "look for better managers".

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