Since 2012, net cash flows of private equity funds worldwide have been positive—the last three years with full returns each handily exceeding $130 billion. With returns through the middle of 2016, however, last year’s net cash flows stand at $27 billion, putting the back half of 2016 under considerable stress to even leave the year at more than $100 billion.
This diminishing metric is attributable to a variety of factors, including the winding down of the buyout cycle and a sluggish exit market. Preliminary figures for the first quarter of 2017 indicate a significant downturn in PE-backed exit volume in the US, even after a somewhat diminished 2016. Regardless of whether those preliminary figures hold, it would take a more-than-robust exit market to enable such heightened cash flows as would be necessary to match the tally of the prior three years.
Of course, such heavily positive cash flows aren’t critical for the industry; the disparity is driven primarily by the sums still being invested by limited partners given current market conditions, as opposed to a plunge in money returned. Distributions have been strong, enabling significant fundraising success in terms of GPs hitting their targets.
Accordingly, 2016 and even 2017 may well see a moderate decline in positive net cash flow, without such an occurrence boding poorly for the health of the industry. The longer it prolongs, however, the more complicated the fundraising picture becomes for fund sponsors in general, particularly first-time firms.
Note: This column was previously published in The Lead Left.
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Article by Garrett James Black, PitchBook