Showing LPs the money

Money may be starting to flow back to limited partners, but those with younger private equity portfolios continue to feel the pinch.

The Maryland Retirement System, a $31.8 billion pension, has pulled back from private equity commitments in recent months because it says the “normal cycle of calldowns and distributions has been broken since late 2008”.

Maryland is likely feeling pressure to honour capital calls from its GPs without benefiting from a proportionate amount of distributions coming back from those GPs. This is because the pension made a big push into the asset class starting in 2008, when it ramped up its allocation to private equity from 5 to 15 percent. Maryland made more than $1 billion of commitments to private equity since it raised its allocation.

The pension is now facing pressure that many LPs with younger private equity programmes are feeling. Funds raised from 2005 to this year are well into the process of calling down capital, but are not necessarily returning capital to LPs.

Triago, a placement agent and secondaries advisor, found that within the universe of about 200 funds it tracks, capital calls have been outpacing distributions by a significant amount. According to Triago, capital calls were 5.3 percent of all committed capital in 2009, and distributions were just 2 percent. This year, capital calls were 9.4 percent of committed capital, while distributions were 2.8 percent.

The universe for Triago’s study consists of funds it sees in the secondaries market, which tend to be from more recent vintages, from 2005 and later.

The result of this widening gap between capital calls and distributions could be “smaller contributions to fewer fund managers”, the firm said in its quarterly newsletter in October. “This promises ongoing fundraising difficulty for general partners.”

However, not every LP is feeling this pinch. In fact, general industry information from Cambridge Associates has found that the gap between capital calls and distributions is narrower this year than it has been for several years.

In the first half of 2010 capital calls outpaced distributions by about 1.4 times, the smallest margin in the past two years, said Cambridge.

In 2009, calls for capital by GPs outpaced distributions by 1.9 times. LPs had an even tougher time in 2008, when capital calls outpaced distributions by about 2.5 times, the widest margin in the time period Cambridge studied, which stretched back to 1996. Cambridge’s information comes from a universe of about 850 funds.

Distributions are being driven to some extent by GPs’ ability to access the debt markets and perform leverage recapitalisations on their portfolio companies, according to Andrea Auerbach, a managing director with Cambridge. Also, many GPs are keen to give money back to LPs because they are planning on launching new funds next year and they have to establish track records, she says.

“If you want to fundraise, you need to demonstrate you’ve had some exits,” she says.

Tulane University’s $1 billion endowment has been seeing a steady stream of distributions, according to managing director Sam Masoudi.

“Distributions were never really that bad. We’ve had a lot of distributions from our funds of funds and from oil and gas,” Masoudi says. “We had some growth funds that have had great distributions as well.”

Ultimately, LPs have unique experiences when it comes to distributions and their ability to contribute to new funds going forward. A programme like Tulane’s is ready to move into new funds next year, while Maryland has been sitting on the sidelines tending its unfunded commitments.

A lot of whether the capital call/distribution cycle is working for an LP depends on the maturity of the institution’s portfolio, with older funds being more productive. Funds raised prior to 2004 have been “getting a healthy amount of distributions”, says David Chiang, a managing director with Wilshire Private Markets.

“Essentially, if you’re an LP that is more recent to the asset class, I’d say within the last five years, there is probably a greater concern the realisations haven’t come in yet,” Chiang says.