LBO funds march towards ‘sub-optimal’ asset exposure

Dividend recaps and a favourable exit environment are causing LBO funds to deliver liquidity earlier, according to eFront data.

Leveraged buyout fund returns are weakening as the time to deliver liquidity shortens, according to research from private equity software provider eFront.

It took on average 2.7 years for active LBO funds to reach liquidity as of the second quarter of this year, down from a peak of four years at the end of 2015 and below the three-year long-term average, eFront’s latest Quarterly Private Equity Performance report showed.

Fund performance is starting to mirror this decline. The average total-value-to-paid-in multiple of active LBO funds hit 1.49x in the third quarter of last year, a 10-year high. This subsequently dropped for three consecutive quarters to 1.44x as of the end of the second quarter this year.

The falling time to liquidity could be explained by dividend recaps as credit remains affordable, as well as an increase in the number of exits, often recorded at the end of a calendar year, the report noted. Significant numbers of recently added assets to portfolios such as add-ons could also explain the drop.

“Time-to-liquidity could soon reach the point where the exposure of fund investors to underlying assets could be seen as sub-optimal, below 2.5 years,” eFront noted.