Up to 2007, Yale University enjoyed steady returns by allocating a portion of their endowment funds to alternative assets such as private equity funds. As The Economist observed, manager David Swenson had “a first-mover advantage; by being an early investor in private equity it was able to get access to the best-managed funds.”
The Crash of 2008/2009 turned many of the funds into zombies, and needless to say, legions of copycat institutions were left holding the bag.
Retail Investors Will Buy Anything
There is a steady belief that owning Treasury bonds is madness because interest rates are so low the only way it can go is up. Even Britney Spears’ conservators think so, and asked for an emergency hearing to modify her asset allocation:
“We modified so we could stay ahead of shifts in the economy, as they are changing now more rapidly than they were over the last three years,” conservatorship attorney Andrew Wallet tells E! News.
Geraldine Wyle, another attorney for the conservatorship, says it is imperative that the judge allow them to make these changes now and not three months down the road.
“We needed to get some freedom to open it up,” she explains about the decision to file to an ex parte motion, which expedites the process to have the matter heard immediately, in lieu of a standard petition, which could take months before moving ahead.
Wallet reveals that Spears’ assets had been “stuck in bonds by court order, and bonds are flat.” He said Judge Goetz’s ruling now gives the singer’s investment advisors more flexibility to respond to the changing market conditions.
Return of the Undead
What an opportunity for the private equity guys. A new crop of low-hanging fruit is ripe for the picking, and as a bonus, perhaps there is even a convenient exit for institutions. Masterstroke!
The Carlyle Group just cut the minimum investment to $50,000 for their new buyout fund:
The lowered entry point is down from Carlyle’s earlier minimum investment of between $5 million and $20 million, according to a filing made with the U.S. Securities and Exchange Commission (SEC) in January.
The opportunity to invest in the new Carlyle buyout fund will be available to “accredited investors,” who are defined as having a net worth in excess of $1 million, or income in excess of $200,000 in each of the two preceding years prior to the investment.
It will be so much easier for the fund managers to collect juicy fees from grateful retail investors desperate to unload bonds, few of whom know that a 2 percent per year fee will almost guarantee they pay more than they will ever get back in gains.
2013: Funds that will not die
The incentive for zombies to keep going is simple: though there are no profits to split, and no long-term future to look forward to, there are still juicy fees to be had.
… a near-dead fund that ties up investors’ money and continues charging them fees even as hopes of profiting from its remaining assets have faded.
It is a little-known horror show in the investment world. Of the roughly 10,000 private-equity funds raised over the past decade, at least 200 now qualify as zombie funds, accounting for as much as $100 billion of the $1.5 trillion currently invested in these vehicles, according to consultants TorreyCove Capital Partners LLC.
About half of all institutional private equity investors have a stake in a “zombie fund” where unsuccessful managers with no hope of getting a bonus are holding on to the investments as long as possible to live off the management fee, a global survey shows.
. . .
The situation is most prevalent in North America, where 57 per cent of the investors said they had capital locked in an underperforming fund, according to the Global Private Equity Barometer, due to be published on Monday by Coller Capital.
Private equity funds are typically structured with a 1.5 to 2 per cent management fee and “carried interest” that pays managers a 20 per cent share of the profits.
Good luck, all.