GPs test LP patience as calls outweigh distributions

Investors are waiting longer for distributions from the managers they back, according to research by placement agent Triago, as general partners delay exits until markets improve.

Historically, private equity funds returned more than 50 percent of committed capital to investors after six years, with all capital returned by year 10, according to placement agent Triago. But a difficult exit environment has led to a record number of unrealised investments as GPs hold on to assets for longer. That in turn has meant limited partners are having to wait longer for returns.

Just 10 percent of 2006-vintage funds have paid back 50 percent of their capital after six years, with the average fund returning just 19 percent, Triago said in its Quarterly bulletin.

The story for 2005 funds is only marginally better: they have distributed 42 percent of paid-in capital. Funds from 2004 and 2003 have returned more than two-thirds of their capital, Triago said. But within two years of a typical fund’s expiration, the residual value locked up in these vintages – counting appreciation – is 75 percent of LP investments, it said.

Triago estimates that capital distributed will be just under two-thirds of capital called from LPs this year. It predicts calls will climb to 11 percent of committed capital this year, up from 10 percent last year, while distributions will fall from 9 percent to 7 percent.

Many GPs are not only asking for extensions to investment periods, but to harvesting periods too, Triago observed.

Fortunately, a buoyant secondaries market has given investors eager to generate returns the chance to do so. Selling stakes in private equity funds generated an average 1.35x paid-in capital in the five years to the end of 2011, according to Triago’s proprietary data. That figure represents cash received for secondary stakes together with distributions made by GPs prior to the sale, Triago said.

The ‘sweet-spot’ for optimising annual returns is in year seven of a fund’s life, where typical realised value post-secondary sale is 1.56x paid-in capital, Triago said.