Raymond James CEO Paul Riley, 2012. Scott Eales/Bloomberg via Getty Images
Private equity funds last year returned the lowest amount of cash to investors since the financial crisis 15 years ago, hampering buyout firms' efforts to launch new investment vehicles, according to Raymond James Financial Co. That's what it means.
Distributions to so-called limited partners amounted to 11.2% of the fund's net asset value, the lowest since 2009 and well below the 25-year median of 25%, the investment bank said.
Rising borrowing costs, volatile markets, and economic uncertainty are making it more difficult for private equity firms to exit existing investments through sales or initial public offerings. This hinders the ability to return money to pension funds and sovereign wealth funds, in addition to other major investors, and once-trusted customers to find capital to allocate new funds to the asset class. It means that you are having a hard time.
“Investor-level cash flow calculations are broken,” Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, said in an interview. Investors are not withdrawing money from their existing holdings, she said, hampering their ability to invest money into new funds or retop existing investments.
The median asset holding period for buyout firms is now 5.6 years, longer than the industry standard of about four years, according to Raymond James.
The impact on fundraising is already evident, with the bank's research showing that the median time it takes to raise new capital is now 21 months, compared to about 18 months just a few years ago. And the number of new funds raised last year fell by 29%.
“This is the worst funding market in history, worse than during the global financial crisis,” Haldea said, adding that this year's expected “tsunami” of deals is yet to be seen, so distributions will only improve in 2025. He added that there is a high possibility that
Still, total capital raised by buyout funds last year reached a record $500 billion, up 51% from 2022, led by the largest funds, Raymond James said.
The glut in 2021 has also strained investors' ability to commit to new capital, especially as private equity's go-to market for big returns has slumped. Pension funds have long been able to expect returns from this asset class to outperform public market returns.
Now, with global stock indexes surging again and the private capital industry grappling with structural change, the math is not so simple.
Jeff Boswell, head of alternative credit at asset management firm NinetyOne, said in an interview that many institutional investors are “fed with the glut of private market funding in 2021.”
