PitchBook Benchmarks Examines Cash Flow Data from Private Equity Funds
September 5, 2019
SEATTLE, Sept. 5, 2019 -- PitchBook, the premier data provider for the private and public equity markets, today released fund performance data through 4Q 2018 from its stand-alone performance measurement product, PitchBook Benchmarks. The comprehensive performance data is designed to help limited partners (LPs) and general partners (GPs) better understand private market fund performance relative to broader asset classes and other PE and VC strategies. Analyses of private market performance tend to focus on how the GP generates returns, but the treatment of uncalled capital is also critical when evaluating the total return of a private market allocation. An LP's decision to commit to a fund often comes several years before that capital is ever transferred to the GP to be invested, creating a challenge for LPs who must balance the need to meet capital calls with the desire to maximize return. In this edition, PitchBook kicks off a Cash Flow Series, which will explore various aspects of private market funds to help investors better understand how to manage a private market allocation and evaluate its true overall performance.
The PitchBook Benchmarks PDF and Excel data packs are available for download here.
"It's unrealistic to think that an LP could ever perfectly time cash flows, but they can more effectively manage their portfolio by better understanding the mechanics of how funds tend to function," said James Gelfer, senior strategist at PitchBook. "A thorough understanding of cash flow patterns will allow LPs to better plan for both capital calls and distributions, enabling them to enhance returns by keeping a smaller portion of their uncalled commitment in low-yielding liquid assets. Even incremental improvement to the management of uncalled capital can reap major returns for LPs and PitchBook looks forward to unpacking the importance of managing uncalled capital in this ongoing series."
PitchBook reviewed cash flow data from PE funds to highlight some of the main variables to consider when evaluating cash flows. Key takeaways include:
On average, PE funds call down about 5% of committed capital per quarter during the heart of the investment period, but the size of distributions can swing widely; half of all PE funds historically have made a capital call of at least 18.9% of the total commitment size at some point in the fund's life, but a fund may also experience multiple consecutive quarters without capital being called.
When trying to anticipate capital calls, fund age and dry powder prove to be the most reliable indicators. Capital calls taper off during a fund's third year, which typically corresponds with dry powder falling to 25% of the fund size.
Drawdown rates evolve throughout the market cycle, with PE funds calling capital more quickly during economic expansions. Furthermore, we observe a structural slowdown in the pace of capital deployment for more recent vintages.
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