US private equity distributes record amount

The $94bn of distributions last year marked the first time since 2005 that capital returned to LPs exceeded committed capital.

Private equity fund managers in the US distributed about $94 billion to limited partners in 2011, a 30 percent rise year over year and the highest amount on record, according to new research from consultant Cambridge Associates.

“A fair amount of that had to do with pent-up realisations that couldn’t clear in 2008 and 2009 because we were in a recession,” Cambridge managing director and head of US private equity Andrea Auerbach told Private Equity International.

After reaching the previous peak of $81 billion in 2007, distributions fell sharply to $32 billion in 2008 and $22 billion in 2009, before rising to roughly $72 billion in 2010.

Another factor contributing to the increase in distributions last year was the need for general partners to return capital to limited partners prior to coming back to market with new funds, according to Auerbach.

“There is a little bit of impetus for managers, after having a couple of dry years in terms of exits, to put exits up, because it was the right time for the company but also because they had mature funds [and] they’d like to raise another fund,” Auerbach said.

The amount of capital returned to LPs last year marked the first time since 2005 that distributions to outpaced contributions.

“Given that we’ve had more muted fundraising since 2009, it’s indeed very possible that distributions could [continue to] outpace capital calls,” Auerbach said.

The roughly $76 billion called by general partners both last year and in 2010 represents the third highest level of capital calls since Cambridge began tracking the industry in 1986, and could work to reduce the estimated $343 billion private equity capital overhang, according to Auerbach.

Still, because roughly 44 percent of the overhang is concentrated at firms with funds of $5 billion or larger, a handful of new mega-funds coming back to market could quickly add to the overhang, Auerbach said.

“The overhang as it relates to larger deals could be quite severe,” she said.

While 2011 was a record year for private equity distributions, in terms of performance, venture capital outperformed the asset class, returning 13.9 percent compared to 10.9 percent for private equity, according to Cambridge’s private equity and venture capital index.

However, private equity continues to outperform venture in the three-year, five-year, and 10-year investment periods.
Both private equity and venture capital outperformed the public markets in 2011, as the NASDAQ returned -1.8 percent and the S&P 500 returned 2.1 percent.