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Private equity can wait out a crash
Locked-up money
The limited partners in a private equity fund are locked up for something like five to seven years, sometimes seven to ten, and can't pull their money out in that window. That lets the firm extend its runway and avoid answering to anybody while a troubled investment recovers.
Hedge fund runs
Hedge funds typically offer much shorter liquidity needs, some daily, some monthly, sometimes over three years. The investors are often the same sovereign wealth funds and endowments, but the terms for taking money out are very different. Too many redemptions can force fire sales, the same dynamic as a run on the bank.
Waiting it out
Caesars did turn around, but only after the restructuring was in place. Had the owners been able to push it out further, they could have made a lot of money.
Blackstone shows the same effect with Hilton. It was set to lose a ton of money on the investment, then made something like $10 billion on it, because it was never forced to sell at the bottom. A hedge fund holding the same position might have had to sell.
Why do hedge funds face sudden withdrawals?
Hedge fund investors can usually redeem on set dates, which may be monthly or quarterly. When markets fall, many investors ask for cash at once. The manager must sell holdings to pay them, often at depressed prices, which lowers the fund's value further. Some funds limit this with gates that cap withdrawals.
Why can't limited partners pull their money out?
Private equity funds are closed-end. Investors commit money for a fixed term and receive cash back only as the fund sells its holdings. A typical fund lasts ten years, with extensions of a year or two. The general partner calls the committed money as it needs it.
How did Blackstone's Hilton deal turn around?
Blackstone agreed to buy Hilton in 2007 for about $26 billion including debt, just before the financial crisis. It held the company through the downturn and took it public in December 2013. Time allowed travel demand and Hilton's earnings to recover. The deal is widely cited as one of the most profitable in private equity history.
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