Will Net Cash Flows Decline For PE Fund Investors?

PE fund investors

Will Net Cash Flows Decline For PE Fund Investors? by Garrett James Black, PitchBook

PE Fund Investors

Since 2010, there has been a markedly recurrent yearly increase in total distributions to investors in private equity funds. This increase, as well as relatively plateaued contributions, has produced a significantly positive net cash flow.

Through the first half of 2015, net cash flow has trended down somewhat, likely due to PE fund managers calling down substantial sums of capital in an environment marked by heated multiples. Distributions have also remained strong but it’s probable that the heights of 2013 and 2014 will remain above final 2015 numbers.

One reason is an increasing spread in quality between targeted assets, with specialized vehicles potentially increasing activity throughout the rest of this year; the result would be significant contributions, pushing down future cash flows. Another potential cause could be a decrease in selling: Secondary buyouts have remained a highly utilized exit route for many PE firms, yet if they wane due to the aforementioned issues of typical company quality across prospective targets, as well as issues around financing, overall exit activity could slide.

How robust M&A remains is another question mark, but, by and large, many of the drivers behind elevated M&A over the past few years are still in place, so PE selling shouldn’t decrease overly much. Consequently, distributions could remain healthy, yet not enough to keep net cash flows from declining.

Note: This column was previously published in The Lead Left.

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