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Warren Buffett, chairman and CEO of Berkshire Hathaway.
Warren Buffett, chairman and CEO of Berkshire Hathaway.

Buyout firms seek to take leaf out of Warren Buffett’s book, eye long-term deals

Big private equity firmsand lots of other people with moneyare looking for a way to get into Warren Buffett's buy-and-hold model of investing. It isn't easy

New York: A few years ago, private equity managers were growing tired of sitting on the sidelines, watching Warren Buffett’s Berkshire Hathaway make landmark investments in Kraft Heinz and BNSF Railway. They wanted to get in the game.

To play, they would need to give themselves lots of time—decades, in fact—and as near-to-permanent capital as they could muster. Ambitious buyout firms bet that by raising long-­duration funds, they would finally have the patient capital to do those eye-watering mega deals that they’d been coveting.

So, a few of the biggest names in the industry, Carlyle Group, Blackstone Group, and KKR, set about building their long-­duration private equity businesses, hiring teams and raising multibillion-­dollar funds (or forming long-life partnerships) to buy companies that are projected to perform well over a longer time frame than the short hold period of a standard buyout fund.

“Having a longer duration—let’s say a 10-year investment hold—is a much more natural investment horizon to have" in some cases, says Carlyle Global Partners LP co-head Tyler Zachem. “It could be that we’re partnering with a family, and they want to have a longer-duration hold partner and limited exit rights. It could be that the management has an investment plan that they want to see executed over a longer period of time."

The big private equity firms aren’t the only ones looking for a way to get into Buffett’s buy-and-hold model of investing. The ever-more sprawling network of global investors who are scrambling for a way to deploy billions upon billions of dollars in the private equity market are also searching for a toehold.

Buffett, however, is no ordinary investor. And only a few managers have found themselves equipped well enough to even attempt to play in his league. The less willing have kept to their traditional three- to five-year hold period for buyout funds, which continue to outperform other asset classes.

“It’s a big ask to go to LPs (limited partners) to lock up their money for 10 years, let alone something well beyond that," Zachem says.

“This is not an asset class where you are going to have the same number of GPs (general partners) getting funded. You have to be incredibly thoughtful about what firms and institutions you have confidence in, given the time frame."

The field is largely limited to these big players, the industry’s precious few household names with a track record and bench of players deep enough for investors to trust them with their cash for two decades.

Aside from the risks of being locked to a manager long-term, being held by a private equity firm for an extended period could also affect the portfolio company’s performance and investor returns, according to Jim Treanor, head of North America advisory services for Pavilion Alternatives Group LLC.

Not all investors are suited to the long-duration model, either. While some massive limited partners, such as Asian and Middle Eastern sovereign wealth funds, can afford to lock up billions of capital for two decades, few investors have that luxury because they need liquidity, says David Fann, chief executive officer of ­TorreyCove Capital Partners LLC. And at a time when many investors like US public pension systems are struggling to meet their expected rates of return, accepting lower returns—even in return for long duration and lower fees—isn’t appealing for everyone, he says. Bloomberg

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