(Bloomberg) — Private equity funds returned the lowest amount of cash to investors last year since the financial crisis 15 years ago, according to Raymond James Financial Inc., hampering efforts by buyout firms to launch new investment vehicles.
Distributions to so-called limited partners totaled 11.2% of the fund’s net asset value, the lowest level since 2009 and well below the 25% median over the past 25 years, according to the investment bank.
Rising borrowing costs, market volatility and economic uncertainty have made it more difficult for private equity firms to exit existing investments through sales or initial public offerings. This has in turn hampered their ability to return capital to pensions and sovereign wealth funds, in addition to other major investors, meaning once reliable clients are struggling to find cash to allocate new funds to the asset class.
“The cash flow math at the investor level is broken,” Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, said in an interview. As investors are unable to recoup money from existing holdings, she said , so their ability to put money into new funds or reinvest in existing investments is hampered.
Raymond James said the median holding period for acquiring company assets is now 5.6 years, longer than the industry standard of about four years.
The impact on fundraising is already clear: according to the bank’s research, the median time to raise a new fund is now 21 months, compared with about 18 months just a few years ago. New fundraising fell 29% last year.
“This is the worst funding market ever, even worse than during the global financial crisis,” Haldea said, adding that as the “wave” of deal forecasts for this year has yet to materialize, allocations may only happen in 2025. year improved.
Still, total capital raised by buyout funds reached a record $500 billion last year, driven by the largest funds, a 51% increase from 2022, Raymond James said.
The financing glut in 2021 is also putting pressure on investors’ ability to invest in new funds, especially as huge returns from private equity investments are faltering. Retirement funds can count on the asset class to outperform public market returns over the years.
Now, with global stock indexes booming again and the private capital industry grappling with structural shifts, the math is no longer so simple.
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Jeff Boswell, head of alternative credit at money management company Ninety One, said in an interview that many institutional investors are “comfortable with the glut of private market financing in 2021.”
