LP capital hangs in commitment limbo

An increasing gap between capital calls and distributions could translate into longer investment periods or fund size reductions, according to a report from eFront.

Limited partner capital is being tied up in commitments to private equity funds as growing competition for assets hinders spending.

Private equity distributions have outweighed capital calls for the past five years, with the divergence increasing sharply since the first quarter of 2016, according to data from private equity software provider eFront. LPs had on average 1.2 percent of their committed capital to a given fund called in the fourth quarter of last year, a record low, while net distributions have accelerated dramatically.

An imbalance in distributions and capital calls may result in LPs committing even more capital to PE funds as they vie to put the returned money to work, the report noted. A resulting build-up of additional dry powder could translate into a further extension of investment periods of active funds or fund size reductions.

GPs’ deployment has slowed as near-record levels of capital flowed into private equity funds last year, creating a surplus of dry powder amid high valuations. Heightened spending power has resulted in a seller’s market, generating healthy distributions and prompting GPs to think twice about deploying capital into overpriced assets.

EMEA-based GPs deployed €19.2 billion through 857 entry transactions in the first quarter of this year, down from €37 billion across 913 such deals from the same period in 2017, according to research from S&P Global Market Intelligence in April.

“We’re noticing the slowdown already – investment pace is slightly behind our expectations,” one European pension manager told Private Equity International in March, adding that an inability to deploy capital could prompt some managers to alter their investment strategies.

Some LPs are urging their GPs to look at distressed or turnaround situations to make their transactions financially viable, the pension manager added.

“They need to find less-well performing companies to be able to pay below 10x entry multiples.”

The eFront report analysed 1,000 GPs managing around 4,000 funds globally.