Capital calls slowly catch up with distributions

  • LACERA projects drawdowns to outpace distributions
  • Sources still expect robust distribution activity
  • Distributions, capital calls influence LP commitment pacing

It’s been a good half-decade for limited partners.

Private equity fund investors enjoyed positive cash flows from 2011 through 2014, according to Pitchbook data (see Pitchbook chart). Total distributions nearly doubled the amount general partners called from LPs in 2013, and in the first half of last year, LPs received $1.43 for every dollar their fund managers called for new investments.

Return data for the second half of 2015 won’t be available for some time, and Pitchbook projects that cash-flow trends remained consistent through year-end 2015. That said, as the level of opportunity for distressed deals ticks upward, and dormant distressed funds begin to deploy capital en masse, “we expect to see an increase in contributions,” Pitchbook said.

“Right now we’re seeing less capital calls and more distributions,” said Nizar Tarhuni, a senior analyst at Pitchbook. “I think we’ll get a window relatively soon where there will be more capital calls and less distributions.”

As debt markets tighten, large GPs like Apollo Global Management have transitioned from sellers into buyers. As a result, several Buyouts sources say they expect investment proceeds to wane as the environment for exits weakens. Those same sources say aggregate capital calls may catch up to aggregate distributions in the near term.

One LP, the Los Angeles County Employees Retirement Association, is preparing for this type of environment. The pension system expects capital calls to outpace distributions in the near term and prepared its pacing model to account for the new market dynamic.

LACERA expects its private equity managers to draw down $1.8 billion of its commitments this year, compared with $1.3 billion in projected distributions, according to pension documents (see LACERA projections).

The trend will continue to play out over the next several years, according to LACERA. The $48.4 billion retirement system doesn’t expect its private equity program’s annual cash flows to move into positive territory until 2019. This is important because “when distributions slow, [LPs’] annual [commitment] pace slows,” said an LP adviser.

While LACERA’s private-equity cash flows were positive in 2015, the retirement system fell roughly 25 percent short of its $2 billion commitment pace last year. For 2016, LACERA cut its projected commitment pace down to $1.5 billion. (Projected commitment paces are subject to change with market conditions.)

Importantly, LACERA’s projections appear to be an outlier among LPs. Most sources who spoke with Buyouts said they do not believe distributions will stall to the point of being overtaken by capital calls. Instead, most sources said they believed capital calls would begin catching up to distributions in the near term.

This does not mean distributions will come to a complete halt. Even with the wave of distributions seen since 2011, GPs continued to be extremely active deploying capital, sources said. This kept the industry’s overall net asset value — that is, the value of portfolio companies held by private equity firms — relatively stable. Therefore, a strong pipeline of assets will still need to be exited over the next few years.

“It’s still working its way through the python. There’s a lot of capital resident in private equity portfolios,” said Keirsten Lawton of Cambridge Associates. “So, to think it could flip all the way to capital calls surpassing distributions, I don’t think that happens anytime soon. They’re long-tailed events.”

Similarly, Christian Kallen of Hamilton Lane said the gap between aggregate capital calls and distributions will narrow. However, “even with all the distributions being sent out … there’s still significant NAV out there that could be distributed and exited,” he said. “It’s hard to tell how it’s going to play out.”

Action Item: To download Pitchbook’s first-half report, visit

Paul Centopani contributed to this report