Despite a recent record distribution of capital, if GPs continue to find attractive exit routes, then high distribution levels are likely to continue for some time, notes Preqin.

Preqin in a September 2014 report titled: “Record Private Equity Distributions – Will It Continue?” notes LPs will be relieved to see distribution levels picking up following the lack of capital return between 2008 and 2010.

Private equity: Record capital distribution

According to the Preqin report, record amount of capital have been distributed to investors globally in 2013 with a total of $388 billion called and $568 billion distributed. This is in comparison to $492 billion and $381 billion respectively in 2012. As captured in the following graph, 2013 was a notable year for the extent to which distributions have surpassed amounts called:

Record distribution Private Equity

The report highlights that as of December 2013, total annual distributions surpassed capital calls by 46%, while only 2004, 2005 and 2011 have witnessed distributions exceeding called capital, and only by a small margin between 3% and 7%.

Thanks to sluggish deal environment between 2008 and 2010, fund managers have been holding onto investments longer. As can be seen from the following graph, private equity-backed portfolio companies that were exited in 2014 YTD had an average holding period of six years, clearly highlighting the longer time it has taken GPs to sell investments that were purchased at peak prices during the buyout boom.

Longer holding period Private Equity

More capital in investors’ hands

The Preqin report highlights that there has been enhanced exit activity and distributions have outweighed contributions recently, implying investors are likely to have more capital available to commit to new private equity funds in the near future.

The following graph highlights exit activity across various categories:

Exit activity Private Equity

According to the report, there is a clear upward trend in both the current and target allocations to PE, supporting the growth of the industry as a whole.

Current and target allocations Private Equity

The report highlights there is evidence that a substantial proportion of the capital recently distributed to LPs will return to the asset class in new commitments.

By delving deeper into its database, the Preqin report notes the record distribution levels witnessed in 2013 were the result of the continued growth of the PE asset class and the ongoing recovery of the financial markets which has led to more favorable market conditions.

Armed with its latest investor survey, the Preqin report notes a majority of LPs are currently satisfied with their PE portfolios and are looking to enhance their allocations. With a significant proportion of investments made pre-2008 yet to be realized, the report concludes that if GPs continue to find attractive exit routes, then high distribution levels are here to stay for some time.