Friday Letter Money in, money out

Friendlier debt markets have helped revive private equity deal and exit activity this year, just in time for impending fundraisings.  

Some good news for limited partners: as capital calls have picked up with increased deal activity, GPs have also been making more distributions than they have for the past few years.

Cambridge Associates and Wilshire Associates have found distributions, especially from funds raised prior to 2005, have rebounded.

Cambridge revealed that in the first half of 2010, capital calls outpaced distributions by about 1.4 times, the smallest margin in the past two years. In 2009, calls for capital by GPs outpaced distributions by 1.9 times. LPs had a tough time in 2008, when capital calls outpaced distributions by about 2.5 times, the widest margin in the time period Cambridge studied, which stretched back to 1996. Cambridge’s information comes from a universe of about 850 funds.

Wilshire, meanwhile, has observed a 60/40 split between dollars going out and dollars coming in this year, based on data for about 450 funds.

This trend is likely to continue as some exits, especially leveraged recapitalisations, have become easier as credit markets have loosened. A recent high profile example was the $2 billion dividend Kohlberg Kravis Roberts and Bain Capital paid themselves from portfolio company HCA, which announced it was selling $1.53 billion in high-yield debt.

The one area where LPs may be feeling some pressure is in regards to newer funds –  those raised from 2005 onwards – which have been calling more capital but distributing less than older vintages. This could be especially trying to LPs with newer programmes, who aren’t seeing the benefit of distributions from older funds and have to contend with honouring increased capital calls.

But overall, the capital call/distribution cycle seems to be stabilising after the volatility experienced during the past two years. This trend is expected to continue, which is good news not just for the LP community but also for the many private equity fund managers who plan to raise fresh funds next year. While the fundraising environment is expected to remain extremely challenging, some GPs will be able to approach LPs with good news – in the form of hard cash – before they pull out their PPM.