Private equity’s push into permanent capital is set to accelerate as firms
pursue a more stable base of assets, according to McKinsey & Company.
Overall capital raising by private equity firms, which reached $503 billion
last year, “understates total fundraising growth” with many GPs
diversifying away from traditional blind-pool fundraises and into permanent
capital sources, the consultant noted in its latest Private Markets Annual
“Fundraising volatility in 2020 highlighted the benefits of permanent
capital,” Brian Vickery, a partner at McKinsey, told Private Equity
Vickery noted that permanent capital vehicles will continue to be utilised
“where they are the right fit for a given strategy, remaining complementary
with more traditional closed-end structures”.
In recent years, GPs have sought permanent capital mainly through
long-dated fund vehicles, acquisitions of insurance companies and GP stakes
sales. Last year, special purpose acquisition companies also become another
form of permanent capital, according to the report.
Carlyle Group expects more permanent capital vehicles as well as strategic
acquisitions to be important components of its $130 billion target for its
2021-24 fundraising cycle. This assumes “continued building” on its
existing permanent capital vehicles in real estate and credit, as well as
its insurance business Fortitude, said chief financial officer Curt Buser
during the firm’s investor day in February.
Blackstone is also in pursuit of more growth in its “perpetual capital
products”, which made up about half of its $32 billion of inflows in the
first quarter, according to its latest earnings results. “Perpetual capital
remains in the ground and compounds in value, generating management fees,
and in most cases, recurring performance revenues, without asset sales,”
the firm’s president and chief operating officer Jon Gray said during the
call. These strategies are the fastest growing areas of the firm, he noted.
Long-dated funds, which range from 15 to 25 years, raised over $13 billion
last year. These include Blackstone Core Equity Partners II, which held the
final close on its hard-cap of $8 billion in October, and Castik Capital’s
EPIC II, which collected €1.25 billion after less than one year in market.
BlackRock has raised at least $3.44 billion for its direct private equity
strategy, Long Term Private Capital. The merits of the strategy include
giving GPs “greater flexibility to invest in businesses hitched to
longer-term macroeconomic shifts, with less pressure to sell ‘good’
companies simply because the fund vehicle is nearing the end of its
contractual life”, according to McKinsey’s report. LPs also benefit from a
reduced underwriting volume and having fewer annual fund commitments to
manage, the report noted.
GPs have also targeted insurance assets in recent years as a way to benefit
from its “captive” stream of fee income and to profit from M&A roll-ups
in the market, according to the consultancy. Insurance-related capital
makes up between 15 percent and 40 percent of total AUM for some of the
world’s larger PE firms, it noted in a November report.
Last July, KKR acquired over 60 percent of Global Atlantic Financial, a
retirement and life insurance provider with over $70 billion of invested
assets. That deal provides a “virtuous cycle of growth” for KKR because it
can source low-cost liabilities that build fee related earnings and
profitability for the firm, said KKR co-president and co-COO Scott Nuttall,
during its investor day this month. Blackstone, Carlyle and Apollo Global
Management and Värde Partners also have insurance assets.
GP stakes have also been a hot strategy for many private equity firms. GP
stakes funds in the market, including those managed by Dyal Capital
Partners, Blackstone Strategic Capital and Goldmans Sachs’ Petershill unit
are targeting at least $20 billion between them, according to data from
PitchBook. LPs see GP stakes a means to get long-term exposure to
high-performing managers, while for GP stakes managers, the strategy is a
“convenient means to build a balance sheet of capital that can be more
flexibly deployed than that managed within fund vehicles”, according to the
In addition, the resurgence of SPACs in 2020 has become a source of
permanent capital for GPs, noted McKinsey. More than 400 SPACs held about
$140 billion of capital, according to data from Citadel Securities. GPs see
SPACs as another way to provide investment capital as well as a route to
exit assets. However, some LPs believe the area is fraught with potential
misalignment and governance issues.
To access more of Private Equity International’s global private
equity news and data, visit their website