Private Equity Contributions Outweigh Distributions by 235% - Adding to Denominator Effect

by Etienne Paresys

  • 31 Jul 2009
  • PE

Private equity investors are not receiving as much in distributions from the private equity funds in their portfolios as they anticipated. This became evident by analysing the cash flow of buyout funds, where most of investors’ money is locked-in. Looking at the amount of cash historically distributed by buyout houses back to investors, the enthusiasm for buyout funds is perfectly understandable. During the years 2004 to 2006, the buyout industry was distributing much more capital than it was investing, even though fundraising and deal activity were growing rapidly at the time. 2007 followed the same trend, distributing the largest amount of capital ever, but then the crisis abruptly stopped both distribution and investments. In 2008, the buyout industry reached a standstill, investing less than $150 billion and only distributing $63 billion back to investors. This means that in 2008 LPs were paying 2.35 times more money into buyout funds than they were receiving from them. Such imbalance between cash contributions and distributions left most LPs strapped for cash.

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