Credit Suisse: unrealised value in ‘sunset’ funds rises – exclusive

In a recent report the Credit Suisse Private Fund Group analyses 1,098 active private equity and venture capital funds that were raised prior to 2006. Together these funds have more than $184 billion in unsold assets, according to Preqin data cited in the report titled Private Equity’s Long Tail.

This figure is expected to grow to about $337 billion by 2017, Credit Suisse explained (see figure 1).

“The $337 billion number jumps out,” said Mike Custar, a managing director in the Credit Suisse Private Fund Group. “Given that there was so much capital raised between 2005 and 2008, there appears to be a massive amount of potential secondary supply that’s building” (see figure 2).

The bulk of the unrealised value is expected to come from buyout funds, followed by venture capital funds.

“Venture managers are more likely to end up in tail-end situations because the gestation period for building value can be longer and they typically don’t have control,” said Jeremy Duksin, a director in the private fund group.

Regardless of strategy, Credit Suisse has named these tail-end funds ‘sunset’ funds. “We don’t like the term ‘zombie’ funds, because it sounds pejorative and most GPs are behaving as good fiduciaries,” Custar said.

“Not all ‘sunset’ funds are in need of a solution.  However, many companies within these funds have experienced business plan delays caused by the financial crisis, creating longer hold periods that do not match an LP’s initial underwriting assumptions,” he added.

However of the some 1,000 sunset funds, roughly 213 of the funds are managed by general partners that haven’t raised a successor fund since 2008. Because limited partners have trended towards reducing their overall manager relationships, the number of GPs unable to raise a subsequent fund is likely to increase.

The firm estimates about $29 billion of unrealised capital currently lies in sunset buyout and venture capital funds that were raised before 2006 by a GP that did not then raise a successor fund post-2008 (see figure 3). That amount of capital spans 221 funds, of which 68 have more than $100 million of unrealised value each.

Credit Suisse explained enough time has lapsed in these funds to suggest these GPs’ fundraising efforts have been met with real challenges. Many of the vehicles “may be rife with organisational issues, potentially in need of solutions”.

The issues stemmed from a number of factors including the pace of distributions versus capital calls, which were relatively flat or negative between 2003-2013. The collapse of the M&A and IPO markets also created a multi-year chasm in which funds failed to deploy capital and realise returns on schedule.

Credit Suisse also notes that more capital lies in 2006 through 2008-vintage funds. Funds raised between 2006 and 2008 by GPs that did not raise a successor fund have more than $103 billion of aggregate unrealised value.

Figure 1