Why You Should Consider a “Permanent Capital” Investment Strategy

Much of the capital available to Small and Medium Enterprises (SMEs) around the world is in the form of private equity. Most of this capital is allocated via Private Equity (PE) firms that are generally structured with 10-year terms, and the investment target is 3x to 5x return in 3 to 5 years on each investment they make. This model has worked well based on the growth of the amount of capital that is deployed in this manner and the impressive returns these PE firms have delivered.

There is, however, a class of entrepreneurs who are more likely to think in terms of building a lasting or “legacy” business, usually over decades or even generations, and do not think in terms of “exits” or “liquidity events”, which are requirements of the prevailing PE paradigm.

An alternative PE strategy to the “3x to 5x in 3 to 5 years” strategy can be labeled a “permanent capital” strategy. Organizations such as endowments, foundations, family offices, insurance companies, pension plans and Sovereign Wealth Funds (SWFs) all will typically have significant holdings of permanent capital.

Any organization that has “permanent capital” has several reasons to consider an allocation to a permanent capital investment strategy within the Private Equity asset class. A permanent capital strategy has the potential to provide superior returns based on:

  1. Better entry prices
  2. Fewer transaction costs
  3. Tax advantages, and
  4. Better exit prices

This paper elaborates on these potential advantages as well as recognizing some of the challenges and disadvantages of permanent capital strategies in private equity investing.

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