December 14, 2015
Interviewed by: David Snow
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The Inside Scoop on the Distributions ‘Boom’

The period through January 2015 showed the highest-ever level of distributions to limited partners. Experts from Cambridge Associates, Coller Capital, and Guardian Life discuss what’s behind the rise.

The period through January 2015 showed the highest-ever level of distributions to limited partners. Experts from Cambridge Associates, Coller Capital, and Guardian Life discuss what’s behind the rise.

Dissecting the Distributions Boom
Private Equity Performance

David Snow, Privcap: Today, we’re joined by Andrea Auerbach of Cambridge Associates, Maurice Gordon of Guardian Life Insurance, and Luca Salvato of Coller Capital. Welcome to Privcap. Thank you for being here.

Unison: Thank you. Great being here. Good to be here.

Snow: Right now in the private equity market, we are—or you all are—experiencing record levels of distributions. That’s, I think, good news.

Andrea, we are looking at Cambridge data on distributions coming back to LPs. And I see that for the period ending in 2015, it is the biggest number. So, tell us what’s going on right now by way of distributions.

Andrea Auerbach, Cambridge Associates: The chart you see shows distributions to LPs from 2006 to 2015. And it’s definitely not lost on anyone at this table that distributions through January 2015 are the highest they’ve ever been, at about $147 billion. That is the fourth year in a row of year-over-year increases of distributions to LPs. [It’s] very substantial and significant and we definitely think a lot of that money is getting plowed right back into the space because fundraising is obviously also on the rise year-over-year, across the exact same timeframe.

Snow: If you go back to the previous boom time in private equity, which is 2007, the distributions now are essentially double what was happening even back in the earlier golden era of private equity. Maurice, as someone overseeing a major private equity program, are you benefiting from this gusher of distributions?

Maurice Gordon, Guardian Life: Absolutely. I would like to thank all the GPs and sponsors for doing the hard work and learning from the mistakes in the past. Many people held on all the way up and then rode it all the way down and never sold, right? So, I think a lot of people have learned that lesson. When you’re getting paid very well to exit, you should really do that. And being in a mutual insurance company, we need a distribution to actually generate income to pay a dividend. So, it’s very much appreciated that people are taking advantage of this good market.

Snow: What are you observing at Coller, Luca? A lot of distributions?

Luca Salvato, Coller Capital: Yeah. From our portfolio, it’s probably the healthiest distribution we’ve seen in a long time. But there is an interesting dynamic when you look at the market, certainly, if you go back over the last 10 years and you compare invested capital against distributions, because what you’re seeing currently is a flip in terms of that trend where you’re having distributions outpace invested capital.

Prior to that, in the buildup to what I would say was the previous peak in 2007 or 2008, it was the inverse. That ultimately meant that it was building constant amount of capital that was invested in the ground that was increasing rather than decreasing. And I think what you’re seeing today is—obviously, with the run of the equity markets, you’re getting people who are actually buy-selling and distributing. They’re bleeding off that NAV that is, in essence, captured in those funds.

But there’s still a long way to go. If you look at the vintage years of 2005 to ‘08the net asset value that is still captured within those funds is enormous. It’s probably $800 billion or thereabouts, in that order of magnitude, that’s still sitting in those funds. Now, those funds are reaching or coming toward the end of their natural lives. And it’s hard to see that they’re going to be able to release all of that through just natural distributions and selling of companies, because that pressure is building.

Snow: So, what does it mean that LPs—although they are plowing money back into the market—are not plowing [money] in at a fast enough rate to match the distributions they’re getting. Are they being cautious?

Auerbach: Given the excesses of the 2007 era, a lot of the managers that had raised—I think, at one point, megas were $20 billion in size, right? Now, they might be 10, right? I think a lot of managers are simply unable to raise the capital they want to raise in a formal, traditional fund, so they may be seeking it through co-investment in other ways.

Do I think LP commitments are on the rise? Yes, for several reasons. Certainly, a significant one is simply that private equity, as a return-generating strategy, is one of the best ever of all investment strategies. And it continues to attract capital. I do think LP commitments are going to start to go up.

Snow: So, it would be alarming if distributions were much lower. It would mean that GPs having all these portfolio companies that they need to exit are unable to or unwilling to exit.

Salvato: Certainly, the conversation we have with GPs, any GP that has assets—at least to date in the last couple of years—has sold everything that is not bolted to the floor. As a result of what you’re seeing in terms of the valuations, as Andrea was saying, and the increasing valuation is because we are from a valuation perspective, almost at the peaks, if not past the peaks, of 2007 and ‘08 when you look at multiples being paid by GPs in the market.

Snow: It sounds like you’re saying that, despite all these distributions coming back in, GPs should not be beating their chest and bragging about their performance.

Auerbach: What? [Laughter.] What’s today, Tuesday? It definitely happens a lot. A lot of managers took on a lot of capital in 2007 and ’08. They went through the global financial crisis. They’re thrilled that they’ve managed to achieve an exit on behalf of their LPs. They’re going to talk about it and the LPs have been waiting for this information. So, I give them full credit, as Maurice said, in terms of what they’ve been able to deliver back. But it’s right on time.

Also, as we’re encouraging them to sell everything that isn’t tied down, the next question we sent across the table is, “What are you looking at now? What’s your view of the current valuation environment? If you’re raising a fund, tell us what you expect to do in terms of investment pace.” We’re listening very carefully because we also don’t see an end coming to the valuation, the elevated valuation environment that we’re currently in.

Salvato: Yeah, there’s one interesting dynamic as well with GPs because it’s fair to say that they’ve achieved phenomenal distributions. But, if you look at the hold periods or the average hold period in those vintage and funds, they’ve extended enormously.

GPs manage through that in a way that ultimately is what they’re doing. They’re managing the capital for the best interest of their LPs. If you’d had the worst thing you could do at that point in time, and the industry didn’t go through this, but is having LPs forcing the GPs to sell and create those distributions. Because ultimately, the GPs said, “This is the wrong time to sell. This is a business that has a lot of value and we still think will have a lot of value in the future, so we’re going to wait it out.” And what that meant is their hold periods went from four or five years to seven and eight years.

Gordon: Yeah. With regard to beating chests, I think they absolutely should as soon as they show me a 2.9x net, which they’re not, right? Right now, they’re doing their job. They’re getting good returns. Nobody (well, very few) are getting these very outsized returns

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