Consider where the private markets were one year ago in August 2020. Q1 2020 valuations had just been published, indicating private equity funds1 had declined 8% in a single quarter. Investment activity and, more importantly, exit activity had dried up. And, while some green shoots of optimism were beginning to appear, it was not yet clear if that was just wishful thinking or the start of a sustained recovery.
Our August 2020 selves would likely be shocked by what has occurred in the subsequent year. Over the trailing year ending March 31st, 20212, private equity strategies have returned 49% collectively with some posting returns of 70% (!) or more, as illustrated in the chart below. Real asset and credit strategies also posted impressive, though less eye-popping, returns.
Metrics, IRR by Style (USD)
Source: Hamilton Lane Data via Cobalt LP (July 2021). As of March 31, 2021.
Remarkable Recovery in Distribution Activity
Private equity1 distributions slowed to $79B and $81B in Q1 and Q2 2020 respectively (vs. an average of $96B per quarter over the trailing 5 years), among the lowest quarters of distributions since 2013:
Pooled Distributions/Contributions (USD)
Source: Hamilton Lane Data via Cobalt LP (July 2021). As of June 30, 2021.
Then came some welcome relief for LPs: the rebound in distributions came swiftly and in size. A few important takeaways:
- Distributions set an all-time record of $246B in Q2 2021 alone.
- In the trailing 1Y period ending June 30, 2021, distributions totaled $715B, by far a record for any 1Y period.
- Keep in mind, distributions tend to be higher in the second half of the year (especially in Q4). It is likely that calendar year 2021 will wind up a record year for private equity exits.
Trailing 1Y All Private Equity Distributions
In USD Billions
Source: Hamilton Lane Data via Cobalt LP (July 2021)
This increase in distributions is related to the robust growth in net asset value (NAV) over the prior year. As NAV grows, we would expect distributions to rise accordingly (usually on a lag) as managers begin to sell their marked-up assets.
Big Picture: Rate of Distribution
Investors can observe distributions within the context of NAV in the form of the rate of distribution (RD). The chart below shows the 1H 2021 RD by style relative to its 10Y average RD in the first half of the year.
Ratio of 1H2021 RD to 10Y Average 1H RD
Source: Hamilton Lane Data via Cobalt LP (July 2021)
A few things to note at the strategy level:
- Most strategies distributed at a faster rate in 1H 2021 relative to their long-term 1H averages.
- Venture capital and growth equity distributions accelerated the most, with an RD over 40% above long-term averages.
- Surprisingly, large buyout distributions seemingly decelerated in 1H 2021 relative to historical averages. This is partially because large buyout distribution pacing has been robust over the past few years (especially relative to smaller buyout funds, venture capital and growth equity), a phenomenon that yields a higher historical average RD for large buyout.
What This Means for LPs
The first order result is that some LPs may be getting more cash back in 2021 than they would otherwise expect. LPs will need to figure out how to redeploy that cash. We think GPs will have a convenient solution for LPs looking to redeploy those distributions. Specifically, in the form of GPs with big distributions to return to market with new funds in short order, with some returning to market sooner than expected. Recounting stories of recent successful exits is a powerful fundraising tool, especially for newer managers where an exit certifies their ability to generate returns. We’ll be keeping an eye on both distribution activity and fundraising in the coming months – stay tuned!
All data and charts were derived from Cobalt LP by Hamilton Lane.
1 Private equity funds defined as buyout, venture capital, and growth equity funds.
2 March 31st, 2021, reflects the latest available valuations.
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