Listed PE realisations up 25%

A rebound in realisations has bolstered fund managers’ balance sheets, but economic uncertainty continues to dampen their appetite for investment.

Listed private equity firms are filling their coffers, according to the LPEQ Deloitte Cash Flow Compass Review to September 2012. Realisation activity, picking up after a subdued first half of the year, was up 25 percent year-on-year in the third quarter.

This confirms a positive trend for the sector: listed funds of funds have recorded net inflows for 11 of the past 12 quarters.

The spur in cash generation is linked to the maturation of many portfolios, according to Ross Butler, spokesman for LPEQ. “The average age of [a] portfolio may fall as more money is put to work, but at the moment they are quite old. That’s why we would expect more money coming back, as GPs look to recycle investment and return capital in the prospect of new fundraisings.”

These realisations were mostly driven by corporate acquirers and other private equity firms in Q3. Trade buyers accounted for 46 percent of exits in the 12 months to September 2012, while sales to other funds have increased from 31 percent to 41 percent over the same period.

Sustained cash flows also meant stronger balance sheets for listed funds, Butler said. The ratio of portfolio value to undrawn commitments, which the study singled out as a key measure of balance sheet strength, climbed up to 3.7 times coverage in the third quarter of 2012 from 2.1 times in Q1 2010. “The strength of the listed private equity’s balance sheet means that they are in a much better position to withstand external pressures than they were going into the 2008 crisis”, Butler said.

The investment climate, however, remained markedly subdued. Year-on-year private equity investment activity, as measured by the call rate from listed funds of funds, fell 30 percent in the third quarter. “There’s clearly continued uncertainty out there. It’s not a bull market by any sense of the imagination, so a degree of caution is probably sensible”, Butler said.

Sectors such as industrials (24 percent) and financials (17 percent) were favoured among GP’s portfolios, while consumer discretionary and IT sector companies represented a diminishing share of assets.

“It seems fairly logical to move away from sectors which are cyclical to ones that are defensive, and that’s clearly been happening”, Butler said.