Lower distributions in 2021 open doors for secondaries investors – report

Almost two-thirds of investors said they expect capital calls to exceed distributions in 2021, according to a survey by Montana Capital Partners.

Cashflow management will be an on-going concern for private equity investors into 2021, a report from secondaries firm Montana Capital Partners has found.

Around two-thirds of respondents in the Switzerland-based firm’s Annual Investor Survey 2020 indicated that they expect capital calls to exceed distributions next year, as the drop in exit activity amid covid-19 slows pay-outs to LPs.

For 70 percent of respondents, distributions have decreased slightly or significantly since the onset of the pandemic compared to last year, while capital calls stayed the same or increased for 58 percent of them.

The findings show that investors are worried about distributions and exits, which is especially true for family offices, according to Montana co-founder and managing partner Christian Diller.

“Some of the family offices we spoke to ran an overcommitment strategy over the last year in private equity. And if you have a limited amount of capital available (in the case of family offices) and a high allocation to PE or illiquid asset classes, you might then run into liquidity shortages,” Diller told sister title Private Equity International.

As a result of this expected mismatch between distributions and capital calls, family offices among other investors may want to sell their PE holdings in the secondaries market, or commit smaller amounts of capital private equity, Diller said.

About half of investors expect secondaries funds to benefit from the opportunity to buy into fundamentally sound companies that are underperforming due to the covid-19 pandemic. GP-led preferred equity options (40 percent) were the second-most attractive theme in the secondaries market over the next 12 months, followed by LP stake sales to compensate for capital call mismatches, the report found.

As one investor noted in the report, the full impact of the pandemic has not yet been priced in high valuations of assets, which will “create opportunities, especially for secondaries buyers who will be able to acquire assets at attractive discounts from sellers in need of liquidity due to a decrease in the value of their stock market portfolio”.

Very few investors believe that private equity buyout EBITDA multiples will increase even further from current levels in the next 24 months, while 41 percent of institutional investors and 54 percent of family offices and foundations expect them to remain flat. Some 79 percent of investors expect them to decrease by 1-2 EBITDA multiple turns.

Nearly half of investors in the survey said a key concern over the next 12 to 24 months is a lack of economic recovery despite vaccines rolling out. GPs buying into new companies at too high EBITDA multiples, as well as the impact from political changes in the US, were also big worries for LPs.

Montana gathered more than 100 responses from institutional investors worldwide, representing more than €500 billion in assets under management. The majority of respondents are located in Europe, followed by the US, Asia-Pacific, Canada and Latin America.