Low capital calls set to insulate LBO funds from downturn

eFront’s latest research finds that recent historically low levels of capital calls from LBO funds could protect them as markets fall into recession.

According to the Private Markets in Downturns: 3 Observations report, which looks at LBO and VC performance during crises, the record performance of 2003 and 2009 vintage years in the US LBO market, as well as of 2002 and 2008 vintage years in European LBO market, indicate that funds that invest during a recession or in the early stages of recovery generate superior performance.

Funds that suffered the hardest hit on their NAVs meanwhile, are those with investment periods just prior to downturn. The poorer performance of vintage years 1998-99 and 2005-06 confirms this.

However, in the years running up to the global financial crisis, the annual level of capital calls was very high, reaching 16.3 per cent in 2006 and 19.1 per cent in 2007, as LBO funds put huge sums of capital to work at the top of the market. 

This is in sharp contrast to recent years, with 2018 funds deploying just 4.1 per cent and 2019 funds investing only 3.3 per cent, indicating that GPs were not rushing to deploy capital in a highly priced market and may therefore not experience the fate of vintage years 2005-06. 

During the early 2000s recession and global financial crisis, meanwhile, capital calls never dropped below 5 per cent, indicating that private equity funds are able to keep investing even during the depths of an economic downturn.