Cambridge: Record pace of distributions

GPs have given back more money over the past three quarters than ever before, a function of the friendly capital markets and managers’ desire to impress LPs ahead of fundraisings.

General partners have returned a record amount of capital since last year, for the first time ever distributing more than $20 billion for three quarters in a row, according to Andrea Auerbach, managing director and head of US private equity at Cambridge Associates.

Distributions have been driven by transactional activity stemming from robust capital markets that have allowed firms to take companies public and finance deals. Late last year, deal flow was steady as managers scrambled to sell companies ahead of what they thought was going to be an increased capital gains tax, which never materialised.

GPs who are returning capital to investors are building goodwill for future fundraisings. Limited partners have likely been tracking which managers are distributing capital, which will factor into future decisions about commitments, Auerbach said.

“The world could use more distributions. LPs are appreciating this amount of money coming back,” Auerbach told Private Equity International in an interview Tuesday. “A lot of investors, as part of trying to prune their portfolios, one of the factors in that decision is, ‘what have you done for me lately’? Institutional investors will be very appreciative [of the distributions] and this will go into the calculus when considering committing to the manager.”

Andrea
Auerbach

The Cambridge study focused on a universe of about 900 US private equity funds. The study revealed GPs called down $14.7 billion and distributed $23.2 billion in the second quarter, compared to $15.2 billion of capital calls in the first quarter and $22.9 billion of distributions. The last quarter last year, GPs called $26.2 billion and distributed $28.8 billion. Overall, GPs in Cambridge’s study universe have returned a total of $74.9 billion over the past three quarters.

However, the firm also found that the increase in the level of distributions in the second quarter was only 1.2 percent from the first quarter, the lowest quarterly percentage increase in more than five years. The small increase should not be viewed as a signal that GPs are slowing their pace of distributions, Auerbach said.

“There are big swings in terms of distributions from quarter to quarter,” Auerbach said. “There’s a lot of volatility in the pace of distributions.”

With the amount of capital GPs have deployed over the past year, distributions could keep a steady pace through next year, though that does depend on the health of the capital markets, Auerbach said.

Cambridge also showed that, within its study universe, private equity recorded its ninth straight quarter of positive returns in June. The index scored a 4.5 percent return in the second quarter, down from the 5.4 percent return record in the first quarter, but far exceeding the S&P 500’s .1 percent return.