Why Do You Build Me Up?

NAV in Fully Invested but Unrealized Buyout Funds

Buyout has experienced tremendous growth over the years, especially since the turn of the new decade. This week, we compare the growth of all buyout funds to the portion of such funds that managers have deployed but are still waiting to distribute back to investors. We define the latter sample of funds as those with >70% deployed but with DPI <0.1x. A low DPI suggests that the investments made by the fund have not yet been realized.??

Buyout , like many other private market asset classes, has seen growing demand from investors with record fundraising figures in 2021. Fundraising since then has been more challenging, albeit still far above long-term averages. Deal activity around this time also hit a record amount which meant increasing many funds’ deployment speeds into private markets. This has also since been challenged with quickly changing market conditions. Adding to this, exit activities have been sluggish: Holding periods have increased, IPO markets have remained muted and M&A markets have slowed. All of these factors reduced the pace at which capital was distributed back to investors. This drives the build-up in the share of NAV occupied by “fully invested but unrealized” funds.?

However, it is also important to note that recent years’ deal activities will take time to realize and distribute back; the investment time horizon in this asset class spans across multiple years and requires patient capital. That patience may pay off with record distributions (in absolute terms) if deal activity thaws in 2024.? So, it is most important for investors to stay diversified across managers, vintages and sub-strategies to reduce volatility and maximize the potential to reach target returns.???

Catch up on Chart of the Week.

Definitions

Corporate Finance/Buyout - Any PM fund that generally takes control position by buying a company.?