Private Equity Spotlight May 2016 by Preqin
Distributions Drive Growth in
Using data from Preqin’s Private Equity Online database, Alastair Hannah examines the causes, effects and potential for future private equity distributions.
In September 2014, Preqin examined the record distributions achieved by private equity firms in 2013 and discussed whether or not LPs would continue to receive such high distributions in the following years. Given the significant proportion of capital that was yet to be realized from pre-2008 vintages, high distributions were likely to continue if exit conditions remained favorable.
The latest data from Preqin’s Private Equity Online platform shows that full-year distributions in 2014 greatly exceeded the record levels achieved in 2013: $475bn was distributed ($294bn called) in 2014 compared with $329bn distributed ($217bn called) in 2013 (Fig. 1). Although net capital flows to LPs have been positive since 2011, the extent to which capital distributions exceeded capital calls reached unprecedented levels in 2014: annual distributions surpassed capital calls by 61%, compared with only 14% in 2012 and 52% in 2013. The latest data available, as at 30 June 2015, shows that $189bn was distributed from private equity fund managers to their LPs in the first half of 2015, compared with $117bn in capital calls, representing 40% of the total amount distributed in 2014.
During this time, aggregate exit value declined from $470bn in 2014 to $424bn in 2015. The fall in exit value from H2 2014 ($212bn), which yielded the record distributions, to H2 2015 ($193bn) suggests that the total capital distributed throughout 2015 could be less than the levels witnessed in 2014.
Net cash flows across geographies have not been linear over time, with North America-based funds calling up significantly more capital than was distributed to LPs in 2008: $241bn was called up and only $76bn distributed back (Fig. 2). Europe- and Asia-based funds distributed less capital in 2008 ($45bn and $9bn respectively) but also called up substantially less than their North America-based counterparts ($94bn and $41bn respectively). The result was a net cash fl ow away from LPs in 2008 for these regions (-$49bn and -$32bn respectively).
By 2010, the difference in net cash flow to LPs between regions had narrowed, with North America-based funds calling up $74bn more than was distributed back to LPs, while more capital fl owed into Europe- and Asia-based funds than in previous years ($69bn and $51bn respectively). Furthermore, North America-based funds were the first to deliver positive net cash flows to LPs in 2011 ($38bn), ending a period of called-up capital exceeding distributions across all regions from 2006. It was not until 2013 that Europe-based funds distributed more capital to investors than was called up, while LPs had to wait until 2014 for net cash flows from Asia-based funds to turn positive. This goes a long way to explain current LP appetite first to North America, then Europe, then Asia and emerging markets.
In line with the distribution of capital back from GPs, private equity fundraising has been growing steadily since 2010: aggregate capital raised increased annually from $171bn to a post-crisis peak of $336bn in 2014 (Fig. 3).
Regionally, North America-based fundraising has accounted for a growing proportion of private equity fundraising. The largest increases occurred from 2012 to 2013, when North America-based fundraising accounted for 52% and 60% of global aggregate capital raised respectively. In dollar terms, this represented a $71bn increase in aggregate capital raised, coinciding with the $75bn increase in cash distributed to LPs from North America-based funds. Contrastingly, Europe-based fundraising did not see such an increase in capital secured after Europe-based funds began generating net positive cash fl ow to LPs in 2013. Despite Asia-based funds distributing positive net cash fl ow for LPs in 2014 for the first year since 2001, Asia-based funds actually secured less capital in 2015 ($39bn) than in 2014 ($45bn).
With greater amounts of capital secured in recent years buoyed by the cash delivered to LPs, have private equity funds closed been more or less successful in their fundraising efforts?
In line with greater interest in the asset class from institutional investors, there has been a fall in the average time fund managers spend raising capital, from 20 months in market for funds closed in 2013 to 18.5 months in 2015 (Fig. 4). From 2012, buyout funds have, on average, secured capital faster than venture capital and growth funds. In 2015, buyout funds spent an average of 13 months on the road, compared with 19 months and 22 months for venture capital and growth funds respectively. This represents a substantial decrease in the average time that buyout fund managers spend marketing their funds, compared with 2013 (18 months). Regionally, North America-based funds, on average, have not seen a reduction in time spent in market post-2011, fluctuating around 17.3 months from 2012-2015 – this remains, however, the quickest average time for managers marketing vehicles.
Meanwhile, Europe- and Asia-based firms have spent less time marketing their funds since distributions exceeded capital calls, falling from approximately 20.4 months in 2013 to 19.1 months in 2015 for Europe-based funds, and from 20.2 months in 2014 to 18.6 months in 2015 for Asia-based vehicles.
Since distributions started exceeding capital calls, private equity funds have secured a greater proportion of their initial target sizes. In 2010, private equity funds on average were failing to secure their targets (achieving 91% of initial target size); by 2014, funds were generally more successful, securing 103% of their targets. This is supported across all regions, with the proportion of target size achieved by North America-based funds rising from 88% in 2010 to 107% in 2014; Europe-based funds’ rose from 87% in 2012 to 102% in 2014 and Asia-based funds secured 102% of their target in 2015, up from 89% in 2013.
Will Cash Continue to Flow to Investors?
When the Global Financial Crisis occurred, many private equity funds that bought assets at peak prices during the buyout boom were forced to hold onto investments due to poor exit conditions, causing distributions to LPs to shrink. In the years following the crisis, depressed pricing of companies provided opportunities for those private equity firms with capital to deploy. The exits of companies bought by these 2008-2010 vintage funds contributed to the record distributions witnessed over recent years. Interestingly, the majority of private equity-backed investments made as far back as 2009 have yet to be realized (Fig. 5), indicating the potential for further distributions, should favorable exit conditions allow these investments to be realized.
From 2014 to 2015, the average holding period for North America- and Europe-based portfolio companies fell from approximately 6.0 years to 5.6 years, an illustration of the favorable exit environment (Fig. 6). Data for 2016 so far shows a reverse of this trend for North America and Europe, with average holding periods returning to 6.0 years, while Asia and Rest of World have fallen from 5.3 to 4.4 years and 5.9