The lack of exit strategies for private equity investments is interfering with institutional investors allocations.
The upshot: Private equity investors are no longer receiving piles of fat checks from general partners representing their cut of the funds profits. The faltering economy and debt squeeze are making it more difficult for private equity firms to sell or refinance their portfolio company investments.
With less cash or distributions refilling investor coffers, some investors might not have the capital to make future private equity commitments, and some might find themselves exceeding their target allocations to private equity.
Distribution flows are slowing dramatically from all funds and in all sectors, from buyout to venture capital.
Pension fund officials have worked hard to get larger allocations and now the distributions are not supporting the commitments, said Scott Myers, managing director and co-founder of Cogent Partners, a Dallas-based consulting and investment banking firm in the secondary private equity market.
Although distribution and other portfolio data lag by about two quarters, a number of private equity consultants confirm that distribution flows are down substantially.
Distributions are down quarter-to-quarter from 2007, said Mario Giannini, chief executive officer of private equity consultant and alternative investment manager Hamilton Lane, Bala Cynwyd, Pa. He declined to share data because it is client specific.
There are several factors leading this state of affairs, consultants said. Among them:
•A recessionary economy is making it more difficult for fund managers to sell their portfolio companies or take them public.
•The decrease in value of investors stock portfolios is bringing many investors closer to having their private equity allocations fully funded than they had anticipated. This could wreak havoc with (private equity) assumptions, explained Marc E. Friedberg, managing director of consulting firm, Wilshire Associates, Santa Monica, Calif. Investors could be overallocated, especially foundations and endowments with large allocations or those pension funds with allocations that are close to target allocations.
•New accounting standards are requiring private equity managers to mark their investments to market rather than carry portfolio companies on their books at cost, Mr. Friedberg said.