Growing dramatically over the past two economic cycles, Tail End funds became a significant problem following the 2008 crisis, and worse, they have not gone away easily. Following 2008, Tail End funds represented well over 10% of the entire private equity and debt fund industry—and as alarming, typically taking an investor over a decade to receive an “acceptable” level of distributions. The returns on Tail End funds—both from an IRR and multiple of paid-in capital—are typically dramatically lower than performing funds.
The post-2008 recovery indicates that the next cycle will likely generate materially higher Tail End figures in both invested capital and fund count. At the end of 2017, the key industry benchmarks were at or above pre-2008 levels:
- Total committed capital and aging dry powder;
- Enterprise Value/EBITDA purchase multiples; and
- Debt/EBITDA acquisition multiples.
One of, if not the, most telling indicators of how big the Tail End problem is likely to become is in the number and age of U.S. private equity backed portfolio companies. As the chart below indicates, 2017 ended with approximately 45% more U.S. private equity portfolio companies than in 2008 with approximately 34% of those investments having been made in 2011 or earlier.
At this size and scope and after the pervasiveness seen following the 2008 crisis, Tail End investments have been and will continue to be a significant and growing part of the private equity and debt landscape. To meet expected private portfolio return targets, investors must address and solve the Tail End problem headfirst.