Distributions and capital calls have diverged dramatically in recent years, bringing into question one of the main reasons for investing in secondaries.
Distributions to investors from secondaries funds last year hit 17 percent as a percentage of aggregate fund size, a record high, according to research from alternatives software platform eFront. The annual mean since 2000 has been 9.2 percent.
At the same time, secondaries funds called an average of 2.67 percent of capital from investors in 2017, compared with an annual average of 14.6 percent recorded between 2000 and 2012.
“Chief among [the reasons cited for investing in secondaries] is the shorter time to liquidity as a result of the investments being made in mature portfolios,” eFront noted. An unprecedented shift has taken place since 2013 in the relationship between capital calls and distributions, meaning this may no longer be the case, the report added.
This may be due to funds recycling their record-high distributions to answer capital calls or the use of leverage, according to Cyril Demaria, head of private markets at economics consultancy Wellershoff & Partners.
“The usual suspect is credit lines, which would help reconcile rather significant investment activity as described by Greenhill and other market participants and the rather low capital calls from eFront,” he said. “If underlying funds are mature, they might distribute before credit lines have run their course.”
Returns from secondaries funds remain strong, the research noted. European secondaries funds have returned an average multiple of 1.53x and net internal rate of return of 12.8 percent. US secondaries funds have returned 1.52x and 14.7 percent, respectively.
Distributions are calculated as a proportion of aggregate fund size, capital calls as a proportion of an investor’s commitment.
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