Private equity is clinging to assets for longer, upending its business model

IT STARTED out as a typical private equity (PE) bet: Hellman & Friedman and JMI Equity took human resources provider Kronos private in 2007. The plan was to grow the business for at least a few years, then sell it or take it public. 

But after 19 years of cycling through different funds, Hellman & Friedman still owns Kronos, now known as UKG. And there are no imminent plans for a sale or initial public offering. 

Across the PE industry, buyout firms have been clinging to both prized and hard-to-sell assets for longer. The traditional 10-year fund that was the backbone of the buyout model is vanishing.

“Exits” – as they are known in industry parlance – are often pushed far into the future, leaving investments trapped in portfolios indefinitely.

Welcome to PE’s version of Hotel California. Assets can check in. They rarely leave.

Firms are moving them into newly created “continuation” funds, parking them with insurers or holding them on their own balance sheets.

The moves are upending the original PE model of turnarounds that took a decade or less. Today, the median life of a private equity fund has risen to 15 years, said Todd Miller, global co-head of secondary advisory at Jefferies Financial Group.

“It blows apart the entire economics of PE funds,” said Hugh MacArthur, chairman of the global PE practice at Bain & Co. With longer holding periods, “people are going to scratch their heads and say, ‘why am I doing that?’” 

What started as a temporary reaction to rising interest rates has morphed into a changing business model.

Across the industry, firms are holding onto two types of assets for longer: devalued businesses that are tough to unload, and good investments that provide steady flows of cash. Given the opaque nature of PE, it can be hard to know which assets are performing well and which are in trouble. 

In many cases, holding assets for longer isn’t better.

An analysis of value creation by vintage since 2005 across global private markets showed that returns, measured in multiples of investor contributions, start to stagnate after eight years before declining as holding periods extend, according to Kroll, which manages PE disputes and fund restructurings. 

“The data just doesn’t support holding assets over extended periods,” said Mitchell Mansfield, managing director and global head of fund solutions at Kroll. “After eight years, nothing good happens.”

This new PE terrain has investors rethinking where to put their money. It has also given rise to a slew of new structures devised by money managers, some of which have angered clients and drawn scrutiny from regulators.

The situation is a stark departure from the PE of years past.

Typically, fund managers took about five years to deploy money, and another five to overhaul companies and harvest gains.

Occasionally, they would extend those hold times, but managers largely kept their promise to turn firms around in about a decade, and PE firms became an investor darling, returning billions of dollars in profits.

Years of ultra-low interest rates turbocharged the model. 

Asset managers generally avoided shuffling holdings from one fund to another, even though such moves allowed them to reset lucrative fees. Investors generally have looked down on such moves and viewed them as reflecting the inability of fund managers to get good deals. 

Then the market turned. As interest rates rose in 2022, borrowing costs climbed, valuations fell and the exit market largely froze. Buyout firms struggled to sell companies at prices that would help them generate huge profits. 

Today, the industry has more than 32,000 unsold companies worth US$3.8 trillion trapped in portfolios, according to Bain.

UKG is one of them. The company, majority-owned by Hellman & Freidman and in multiple funds managed by Singapore’s GIC and Blackstone, has been threatened by advances in artificial intelligence. Its value has tumbled.

Executives would rather hold onto the company once known as Kronos, which throws off hundreds of millions of dollars of profits to its owner each year, than risk selling at a valuation they do not like.

Blackstone began talking to investors in 2014 about a new fund structure that would allow it to hold some assets for longer, said Joe Baratta, its global head of PE strategies.

The discussions followed its experience with investments such as Hilton Hotels, which the firm took private in 2007 for US$26 billion. In 2013, Blackstone took it public again, generating US$14 billion in profits for the asset manager. 

Since then, its stock price has only continued to increase: The company went public at US$45.65 a share and traded at US$307.08 at the close of trading in New York on Monday (Sep 21).

Baratta said Hilton was the type of business that Blackstone wished it could have held onto.

“We saw there were certain businesses that have long-dated track records of growth and free cash flow generation,” he said. Blackstone’s so-called perpetual funds, which allow it to retain assets for longer, reached roughly US$556 billion as at Jun 30 and represented nearly 48 per cent of the firm’s fee-earning assets under management.

Blackstone’s moves are part of a broader trend toward raising long-hold “evergreen” funds, in turn part of an industry trend aimed at giving everyday investors access to private markets – and asset managers a forever home for their investments. 

Nearly 40 per cent of Blackstone’s assets are now held in perpetual funds.

Brookfield, meanwhile, has assembled a web of private funds, insurers, listed affiliates and corporate capital over the years that allows it to house assets forever.

KKR & Co set up its Strategic Holdings unit nearly three years ago, a “mini Berkshire” that, like Berkshire Hathaway, is designed to own some investments for decades.

Managers such as Carlyle Group and TPG have also launched perpetual funds. 

Selling the asset instead of holding it might be better for the investors, but the new structure is often more beneficial for the PE firms, which charge fees on the total assets in the funds. As they grow and fees swell, there is less pressure to exit.

“Ten years ago, when the general partner sold an asset, it was a real liquidity event because they got carry,” said Miller, referring to the share of profits investment managers can pocket.

Today, that calculus has shifted as fees have grown large enough that holding assets offers significant returns with fewer costs.

Diminishing payouts

PE clients have always had to deal with illiquidity and uncertainty, but received higher profits in exchange.

Today, the payouts for investors, as a percent of the total net value of PE’s portfolio, are at a near 16-year low. And the seemingly endless life of some holdings can be detrimental to investors, known as limited partners, in these funds. 

One limited partner, the Teacher Retirement System of Texas, has had to twice adjust the way it plans new PE investments after concluding that buyout and venture capital funds would take longer to return money.

“We found that our distribution assumptions were too optimistic, so we extended fund-life assumptions,” said Neil Randall, head of PE at the Texas pension fund, which manages more than US$200 billion of assets. 

In addition, investors say they are irked by the rise of single-asset continuation vehicles because risk becomes too concentrated in one company. One-fifth of limited partners are reducing their buyout allocations, either because of liquidity pressures or concerns about returns, according to Bain.

“I think the limited partners are fairly frustrated,” said Miller of Jefferies, speaking generally. “I think every (limited partner) would like to see the (general partners) winding these things up faster than they are.” 

Conflicting opinions

Fund managers argue that continuation vehicles are necessary because high-quality assets have become harder to find and often require longer holding periods than traditional PE funds allow.

Data centres, power infrastructure, fibre networks and energy-transition projects can take years to build and decades to reach their full value, they say. 

But investors have conflicting opinions about these once-niche continuation transactions, which now account for almost 14 per cent of exits, Jefferies said in a report.

In some cases, the moves have sparked conflict: A dispute between Abu Dhabi Investment Council and Houston-based PE firm Energy & Minerals Group (EMG) erupted late last year when the Middle-Eastern sovereign fund tried to block EMG’s effort to extend its ownership of a natural gas producer. 

Other investors complain that continuation funds reduce pressure to conduct a sale for the right price, and instead let managers keep raking in fees.

When Madison Dearborn Partners was pitching its new fund to investors, a portion of the deal pipeline was potential continuation vehicles. Investors were surprised, a person familiar with the matter said, since such transactions have typically been viewed as an option of last resort.

Some of these vehicles have gone badly wrong.

Platinum Equity created a single-asset continuation vehicle in 2021 to buy portable toilet company United Site Services from another one of its funds. But the concentrated bet on one company ended up unravelling.

Fortress Investment, Ares Management and Blackstone are among the money managers set to lose a combined US$1.4 billion.

Structured finance 

The current lack of exits has also spawned a handful of new financial structures that managers have devised. These enable them to hold onto their assets and wring out liquidity for investors – even as they tap new sources of capital.

Carlyle AlpInvest, Ares, Dawson Partners and Coller Capital are among managers that have launched so-called collateralised fund obligations, which bundle fund stakes into complex debt deals. 

Considered safer because of the way they are constructed, these let fund managers bring in money from insurance companies that would not otherwise be able to invest because of the risk.

Evercore said in May that it expected collateralised fund obligations to top US$30 billion in new volume this year, up 50 per cent from 2025.

It has since updated that forecast based on current activity; the firm now expects the volume to be double the earlier figure, said Ahmet Yetis, a senior managing director in Evercore’s private capital advisory unit.

But not all of the deals are passing muster. Blackstone, for instance, pulled back on its plans to raise a US$3 billion collateralised fund obligation after struggling to find a buyer for the equity tranche of the offering, Bloomberg previously reported.

So-called dividend recapitalisations are yet another way asset management firms are able to hold onto investments for longer.

These let companies borrow money to pay distributions to owners and have spiked in the past three years, accounting for about US$75 billion in 2025, said Jerry Hullinger, head of debt capital markets at Citizens Bank.

Blackstone and Warburg Pincus have loaded more debt onto portfolio company IntraFi to fund a payout to themselves and their limited partners.

Some investors see an opportunity in the changing PE landscape. British Columbia Investment Management, for example, recently launched a strategy that includes capital for continuation vehicles, structured equity and recapitalisations.

“As long as interest rates are high, traditional leverage buyout will be difficult,” said Ramy Rayes, BCI’s executive vice-president of investment strategy and risk. “Whoever doesn’t adapt will not survive.” BLOOMBERG