Commonfund skeptical of long-dated PE funds

  • Commonfund CEO: weaker returns on longer funds
  • Longer-dated funds can benefit understaffed LPs
  • CalPERS plans long fund; NY pledges to Vista Perennial

Long-dated private equity funds appeal to investors who dislike the constant churn of typical PE funds.

But Commonfund isn’t convinced that evergreen funds’ returns will measure up over the long haul.

Large public pensions say long-dated PE funds can match their long-term liabilities better than traditional funds with 10-to-12 year terms can.

New York’s retirement plan recently committed $500 million to Vista’s perennial fund, and CalPERS is going a step further, planning its own perpetual investment vehicle for long-term ownership of “core economy” companies.

Commonfund, managing $24.1 billion in endowment and foundation assets, says those types of funds offer more convenience than returns.

“I’m not a huge fan of the long-dated funds,” Commonfund Capital President and CEO Peter Burns said at the firm’s 2019 outlook breakfast panel Jan. 29.

“[Very few companies] can sustain an edge in whatever they do for 20 years. They may have a great company with great products and great margins, but 15 years later the game may have changed completely, with new technology and new competitors.”

Mark Anson, Commonfund’s CEO and CIO, said long-dated funds also add liquidity risk to a portfolio, even for investors that are in it for the long haul.

“There were a lot of very long-term investors who suddenly became very short-term investors in 2008,” Anson said.

“Some of the smartest investors around the planet, large institutional investors, had to cash out of their private equity portfolios. So the next time that we have a significant speed bump like that, those long-dated perpetual funds are the ones that are going to have the most pain associated with that.”

Evergreen funds do offer convenience to both GPs and LPs. Anson said he could understand why a public pension with a small staff might want to trade higher returns for an easier-to-manage portfolio.

He recalled a conversation with a pension fund that had $40 billion dedicated to PE, with only 1.5 full-time-equivalent staffers to oversee PE investing.

“Now, one and a half people can’t cover $40 billion in private equity investments, so what do they do?” Anson said. “They have to commit to brand names and to long-dated funds. It’s just the convenience factor and the sheer pragmatic nature of how many people they have on their staff.”

GPs, too, can benefit from long-dated funds because they enable them to charge management fees for longer, without going back and raising new pools.

“I think it is a brilliant fundraising strategy for general partners because you can raise a lot of capital,” Burns said. “Why have fees for 10, when you can have fees for 20 years? But I think you’re going to wind up with somewhat mediocre returns at the end of the day.”

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Updated: This article has been updated to include Mark Anson’s title as Commonfund’s CEO.