Chart of the Week #39: "Inorganic" Distributions

Quarterly distribution yield, or distributions as a percentage of starting NAV, has remained below the long-term stable range of 4-8% per quarter for nearly two years. While some market participants predict a rebound in distribution activity in 2H’24, our proprietary NOWCast models suggest that distribution yields will remain below 4% in the near term.

The lack of liquidity has compelled managers to pursue “inorganic” liquidity solutions to generate distributions to their LPs, primarily via continuation vehicles, NAV loans, and strip sales. This has led to near-record GP-led volume of ~$30B in the first half of this year. GP-led transactions, largely comprised of continuation vehicles (~90% in 2024), allow a manager to generate liquidity by moving assets into a new fund and allowing LPs to sell or roll their interest in the assets. With ~85% of LPs opting to sell during continuation vehicle processes, we believe that more than 75% of all GP-led volume results in "inorganic” distributions to LPs.

When combined with the historically low “organic” distribution environment (i.e., selling assets to third-party buyers, IPOs, etc.), we estimate these inorganic distributions will represent ~20% of all distributions to LPs in 2024, nearly double the rate observed during the bull market in 2021. Our analysis is supported by a recent Bain survey of limited partners, which showed that more than 40% of respondents reported that less than 50% of the distributions they received in the first half of 2024 were from the sale of underlying portfolio companies.?

While the GP-led market has provided another avenue for GPs (and LPs) seeking distributions, we believe the true severity of the lack of liquidity in private markets has been partially masked by the recent increase in “inorganic” distribution activity.