Eamon

One of the immutable laws of private equity is that firms have a limited period of time in which to invest their funds, often five years (see table below). Another is that buyout firms don’t like investing during credit crunches or before a downturn has bottomed out. Given that the last five years saw both a credit crunch and major downturn, many buyout firms have had to ask their limited partners for extensions of their investment periods. It will be interesting to see if more firms negotiate six-year investment periods (turnaround shop KPS Capital Partners has one) in the months ahead.

Buyouts, as a whole investment category, generated a cumulative pooled IRR of 11.34 percent from 1978 until the end of March.

Over a 20-year period buyout funds have delivered just less than a 10 percent annual IRR, but it hasn’t always been a smooth ride. Five-year annual returns are just over 5 percent, partly a result of vintage 2006 and 2007 funds running headlong into the Great Recession. More recent returns have been strong thanks to health in the credit markets and a quick recovery in equity valuations.

With management fees coming under pressure, you’ll need to keep tabs on what percentage of those fees rivals are devoting to payroll.

NewWorld Capital, out with a debut fund targeting $300 million, is one of a growing number of buyouts firms offering to return all contributed capital to limited partners (plus a preferred return) before receiving carried interest.

Dividend recaps in the United States have rebounded strongly in the first half of the year, following a lull that coincided with amped-up concerns over the sovereign debt crisis in Europe. Look for more dividend recaps in the second half as creditors continue to warm to the relatively high-yielding loans and sponsors remain eager to return distributions to limited partners.