MassPRIM says distributions barely outweighed contributions as exit market shuts

LPs have become focused on distributions as they balance liquidity needs in a difficult marketplace.

Bucking the current trend of private equity portfolios leaking capital rather than bringing it in, Massachusetts Pension Reserves Investment Management’s private equity portfolio gained slightly positive cash flow for the first quarter of 2023.

Distributions have become a growing concern for LPs as a slowing exit market leaves them with less capital to invest into new funds.

“Our team will increase the focus on distributions in the quarters to come as we view them as an important measure of the health and quality of our portfolio,” said Michael McGirr, MassPRIM’s director of private equity.

McGirr made his remarks at the $94.7 billion system’s investment committee meeting held May 2. Buyouts listened to a broadcast of the meeting.

MassPRIM reported net cash flow of $8 million from its private equity portfolio for the first quarter of 2023, with $402 million in distributions against $394 million in contributions, according to committee documents.

In FY 2022, the system’s private equity portfolio generated $3.3 billion in distributions against $2.9 billion in contributions.

Lower distributions have been caused by a dramatically reduced exit market, with a large spread between buyers and sellers making it difficult to close deals and return money to investors, McGirr said.

In a separate report on risks facing MassPRIM’s total fund, CIO Michael Trotsky said leverage and rising interest rates have impacted exits.

Trotsky and McGirr both said a limited amount of syndicated bank loans for M&A activity, a lack of annual recurring revenue loans for tech companies and lengthier loan approval processes have further complicated the exit market for private equity.

“There’s a double whammy with the lack of available debt along with the cost of that debt rising. When you have a bid-ask spread in the market that’s this wide, it is effectively closing the exit market,” McGirr said.

While distributions slowed, Trotsky said MassPRIM could take advantage of overallocation issues at other large pension systems that need to slow their pacing. Trotsky said that 80 percent of MassPRIM”s peers were overallocated to private equity by 4 percent to 6 percent.

“As a result, many investors are cutting their participation in vintage years that could turn out to be a great opportunity,” Trotsky said.

As of February, MassPRIM allocated 17.4 percent of its total portfolio to private equity, within its targeted range of 13 percent to 19 percent.

McGirr said MassPRIM was also eyeing potential investments in GP-led secondaries to take advantage of other investors enduring overallocations to PE or facing liquidity concerns.