Wellcome Trust’s PE portfolio turns cashflow negative amid capital call slowdown

The UK’s £34.6bn medical research endowment warns of difficult period ahead for private equity, marked by subdued distributions and longer fundraising cycles.

The Wellcome Trust, the UK’s biggest investor in private equity according to the GI 100, saw its PE turn cashflow negative and has said it expects longer fundraising cycles as GPs take longer to deploy capital.

Total capital calls across the endowment’s £14.8 billion ($18 billion; €16.7 billion) private equity portfolio in the year to September reached £1.9 billion, with distributions of £1.6 billion resulting in a net cashflow of minus £355 million, according to its latest annual report published Tuesday.

“We had forecast this given that we have made significant new fund commitments in recent years. However, it was even more negative than expected as distributions fell sharply,” the report noted. “The bear market in public equities meant that the IPO market was effectively closed, while uncertainty and rises in the cost of debt meant merger and acquisition activity slowed down.”

Wellcome Trust’s report comes amid a confluence of events leading to fundraising pressures for GPs. Slower distributions and a flurry of sponsors in market last year has led to pressure on LPs and less capital to go around, stretching fundraising processes into this year in some cases.

The fundraising pressure is forcing LPs to even reconsider re-ups with existing managers, placement agent Pacenote Capital wrote in an end-of-year note. “Prior to 2022, our sense was that the majority of Fund I to Fund II re-ups felt inevitable,” Pacenote wrote. That trend is now over, it said.

Wellcome Trust, which has £34.6 billion in assets, also noted it was seeing a marked slowdown in capital calls due to the wide bid-ask spreads between sellers and buyers. As a result, it expects funds to be deployed more slowly, leading to longer fundraising cycles.

The health research endowment noted that this means its “outstanding commitments will be drawn down relatively slowly in the coming years”.

Private equity accounted for the largest exposure for the endowment, making up 37.1 percent of its total portfolio as of end-September. The largest portion of this is in venture capital funds at £8 billion and buyout funds at £3.9 billion.

The London-headquartered investor saw a significant fall in its net annualised sterling returns for private equity in the year to September to 7.7 percent, from 72.6 percent in the prior period, according to the report. In annualised US dollar returns, it stood at negative 10.8 percent as at the end of the financial year.

This was due to some “sizeable mark downs” in its private equity portfolio, especially with companies that required fresh capital. The endowment noted it anticipates this to be repeated more widely across private assets over time.

By comparison, private equity was its best performing asset class in its 2021 financial year, PEI reported in June last year.

Within PE strategies, venture had the largest decline on performance year-on-year, from 79.6 percent annualised returns in sterling in 2021 to 4.6 percent in 2022. Buyouts have been resilient, and portfolio performance stood at 18.6 percent over the financial year, against 30.5 percent in the prior year.

The endowment made commitments of £3.3 billion to private equity in the year, of which £1.5 billion was to buyouts, £1.4 billion to venture funds and £0.4 billion to direct private investments and co-investments, the report noted.

The investor previously backed funds managed by Silver Lake, Carlyle Group and Advent International, PEI data shows.

Between interest rate rises, persistent inflation and geopolitical shocks, Wellcome noted it expects “a more difficult environment for a considerable time”, which would “potentially create conditions for an extended period of sub-par returns”.