20/08/2018
Private equity portfolios shrink as assets boom
It’s a paradox: private equity firms are continuing to raise capital at a breakneck rate, but their portfolios are tending to shrink. Since 2013, private equity investors have sold off more companies they investetd in than they have bought new ones. According to a study by the financial software investment firm eFront (“Peering Into the Future: Capital Distributions,” FrontLine Research Paper), the pace of investment in the sector has fallen to all-time low levels.According to the study, capital deployed this year by private equity firms represented about 1% of the size of their funds on a quarterly basis, though the distribution rates come to about 3% of the size of funds on a quarterly basis. In other words, uninvested capital is continuing to increase, to over USD1trn, according to Preqin, while portfolios are shrinking.According to eFront, this gap between fundraising and deployment shows that firms are sticking to their performance objectives to deploy more capital. This is good news for investors concerned about the phenomenon of accumulating financial arsenals, which defies the capacity of the setor to remain selective and to maintain some investment discipline. In the mid-term, performance may be higher in case of a severe market correction, as distressed debt funds may be able to react quickly and massively, the study concludes.
