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Editor’s Letter: Looking back on 2017

Now that we’ve arrived at the end of the year, I want to take a moment to look back at some of the interesting themes we tracked here at Buyouts. Many of these will spill over into next year but some may be unique to this time and place.

Three important issues come to mind. First was the spread of capital-call subscription lines, with most firms making use of this type of credit facility. Capital-call borrowing helps smooth out the capital-call process, but it can also boost IRR.

Limited partners have concerns about use of this type of credit line, mostly around how long uncalled capital stays in the facilities. They would like to see such lines last for a few months up to a year. A recent survey by Coller Capital on LP sentiment found use of capital-call subscription lines was near the bottom of a list of concerns.

Second, a handful of large GPs raised longer-life funds for the ability to hold investments longer than they can in the traditional PE-fund structure, which limits hold periods to 10 years or so.

Several sources talked to me this past year about GPs wanting the flexibility to hold investments longer when a longer time frame would maximize value. This is a problem under the traditional PE-fund structure unless the GP gets an extension from LPs, which then creates a whole host of other challenges.

In traditional funds, GPs have been restructuring older vehicles to provide more time to exit investments. Restructurings can be contentious, especially if the GP has underperformed, but such transactions are becoming a more routine part of the market. It’s the market’s solution to the problem of GPs wanting more time to hold investments. Perhaps the ultimate solution will be GPs building in flexibility to future funds for longer hold periods.

Finally, GPs are selling stakes in their management companies. This is a trend that has evolved over the past few years and kept pace in 2017.

Specific managers like Dyal Capital are raising capital for this strategy, and we’re likely to see more of these transactions in 2018. The difference going forward may be that firms look down into the middle market for opportunities. A common sentiment is that the highest quality managers were the first to sell pieces of themselves, and going forward that quality may decline. We’ll see.

Those are three of the big themes we pursued this year. I expect these will continue to be stories in 2018 along with whatever surprises the industry throws at us going forward.

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky