Investor Base: Numbers on the board

Distributions are a crucial part of fundraising; without them, LPs can’t make fresh commitments, and GPs find it harder to prove their worth.

Fortunately for LPs, that wasn’t a problem during the second quarter.

In the US, distributions jumped to $28.7 billion in the second quarter, up 73 percent on the previous quarter, according to research released by Cambridge Associates in November. GPs distributed 2.5x the amount of capital that they called – the highest distribution/capital call proportion recorded in 20 years. It was also the fifth time in the last seven quarters that distributions outpaced contributions.

As LPs enjoy the spoils, GPs also have reason to celebrate. Approximately 630 US-headquartered firms are either fundraising or expected to return to market soon, according to Private Equity International data. And in a crowded fundraising environment, the ability to deliver distributions will stand out.

“Getting realisations back to LPs is important – getting numbers on the board is critical to any manager looking for traction with LPs,” says Keirsten Lawton of Cambridge. “You need to have the realisations to prove out your execution … Mark to market is one thing, but if you haven’t sent any money back to your LPs, you can’t eat IRRs.”

Better still, it does not appear that firms are taking a haircut on pricing or multiples for the sake of an exit. Average exit multiples have been around 0.3x higher than companies’ mark-to-market valuations, Lawton says.

“They’re getting realised at a premium to where they’re marked,” she adds. “It’s an attractive market to sell into.”

“GPs would not elect to exit at a lower valuation simply for a fundraise; it would minimise the return to the LP as well as their own carry if the exit was sought prematurely,” says Institutional Limited Partners Association managing director Michael Elio.

“Given that the debt markets were strong [and] valuations were high, it makes sense that there would be opportunities for exits.”

Furthermore, strong distributions should be expected, given the amount of capital committed to US private equity funds between 2005 and 2009.

“[The high distribution rate] is likely better explained by looking at the cycle where commitments peaked, then they dropped off and investments are now being exited,” Elio says.