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Private Equity

Private equity capital calls consistently lagging distributions – report

Capital calls by private equity firms in 2017 fell to their lowest level in five years, while payouts by these funds remained at higher rates for the period.

Research by alternative investment management software firm eFront found that private equity fund distributions were at 3.47% of a fund size as of the fourth quarter 2017 — the same proportion as of the fourth quarter 2013.

Capital calls, however, were only 1.19% in the fourth quarter last year, having dropped to 0.95% of fund size in the first quarter 2017. That compared to 2.35% in the fourth quarter 2013.

The data, which cover 4,000 private equity funds across the globe, show that starting in 2013, "the distributions significantly and durably exceeded capital calls," said a report of the research.

The report said the current phase is exceptional in terms of duration — with five years of significant net distributions — and the size of the gap.

eFront said this has three consequences. one being the "significant amount of capital distributed that can be reinvested in funds," with the possibility of significant fund commitments in 2018.

The second consequence is that the pace of capital deployment is slower than during the global financial crisis of 2007 to 2009, and the buildup of dry powder could translate into longer investment periods or fund size reductions. As of the fourth quarter 2007, capital calls were 2.92% of fund commitments; 2.12% in the fourth quarter 2008; and 3.64% in the fourth quarter 2009.

"This is clear evidence of discipline in capital deployment by fund managers, and of a buildup of dry powder," said the report.

eFront said the third consequence is that private equity portfolios are contracting, despite a "fast and continuous increase of assets managed by private equity funds."

The report said this is due to residual value. "Assets under management are the sum of the dry powder and the residual value of portfolios. These portfolios are largely marked-to-market to reflect their fair market value. Portfolio companies are quarterly assessed in comparison with their listed peers. As listed stocks have seen a continuous increase in value over the course of the last nine years, the value of assets in portfolio also increased. This phenomenon masked a more muted contribution of new assets to the increase of portfolio valuation," said the report.

"Net capital distributions could in effect be an early indicator of the future dynamics of fundraising, assuming that fund investors do not divert them to direct investments, secondaries or other asset classes," said Tarek Chouman, CEO of eFront, in a statement accompanying the report.

The report is available for download on the eFront website.