January 13, 2016
Interviewed by: David Snow
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LPs Reap Rewards of Record Distributions

While 2015 was a record year for distributions to LPs, as well as for fundraising, Jeff Eaton, a partner at Eaton Partners, says that high valuations have given some investors pause and that money remains on the sidelines. But although they are getting record distributions, they are becoming pickier about the managers they deploy capital to. 

While 2015 was a record year for distributions to LPs, as well as for fundraising, Jeff Eaton, a partner at Eaton Partners, says that high valuations have given some investors pause and that money remains on the sidelines. But although they are getting record distributions, they are becoming pickier about the managers they deploy capital to. 

LPs Reap Rewards of Record Distributions
With Jeff Eaton of Eaton Partners

David Snow, Privcap: We’re joined today by Jeff Eaton of Eaton Partners. Jeff, welcome to Privcap. Thanks for being here.

Jeff Eaton, Eaton Partners: Thanks, David. Thanks for having me.

Snow: Let’s talk about the fact that 2015 has been just about the biggest year ever for LP distributions. In other words, private equity firms sending cash back to the LPs. What are they doing with this capital? Are they turning around and plowing it right back into new private equity funds?

Eaton: Generally speaking, it’s been a great year for exits. When that happens, generally LPs reinvest that money. Normally, they’re going to put it back into the managers that are producing those returns for them. And I would venture to bet that there’s a good correlation between the GPs that are having success fundraising in being the GPs that have been the ones distributing capital back to their investors.

But I’d also say this: valuations are high now in a lot of different industries. Not everywhere, but in a lot of different industries. Whenever you’re in an environment like that, LPs have more pause about [whether they] really want to plow [their] money back in at these valuations. So, even though distributions have been great and fundraising’s been great, there’s probably still some money on the sidelines looking to get back into managers.

Snow: In meeting with LPs around the world, what are they saying to you and your colleagues?

Eaton: Private equity portfolios have outperformed other investments, by far, this year. So, investors are generally very happy that they have had exposure to alternatives and private equity. I think they all believe this is an area they’ve got to continue to invest in and maybe even invest more in.

That said, if you were to look at the dispersion of returns manager to manager, there’s a wide range of performance. So, we’re seeing a trend toward clearly the top-performing groups, which oftentimes have size limitations. Not every LP can get into those groups, so LPs are forced to start looking for new managers that might be focused on similar industries as some of these more well-known groups. I think we’ll see a continued trend toward positive fundraising for first-time funds.

Snow: There must be some level of frustration among LPs in that, on the one hand, they are getting back more cash than ever from their private equity-fund portfolio. But, on the other hand, they are being more picky about who they redeploy that capital with.

Eaton: Think about it: if you’re an investor—if you’re an LP and you’re an investor in 25 funds, that means you’ve got 25 annual meetings to go to each year. You’ve got 25 funds to keep up with and make sure that they’re doing what they said they’d do. A lot of these LPs have limited staff, so it becomes a pretty onerous process to manage.

A lot of these managers, as I said earlier—not all fund managers can grow forever, right? I mean, if you get to a certain size, you’ve got to stray outside your core strategy. That generally leads to a reduction in performance. So, there’s a little bit of—I wouldn’t say crisis, but a dilemma LPs have about not wanting to increase the number of managers they have, but ultimately maybe having to in order to get that same exposure.

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