Private equity net cash flows could see a 65 per cent fall in distributions in 2020, according to new research by HEC Paris.
Private equity net cash flows could see a 65 per cent fall in distributions in 2020, according to new research by HEC Paris.
For funds with USD5 billion in private equity assets the possible shortfall is projected to amount to USD600 million by the end of the year, according to Oliver Gottschalg, associate professor of Strategy and Business Policy at HEC.
Gottschalg’s model uses statistics and AI to leverage information on past cash flows and net asset value fluctuations in private equity – primary buyout funds globally – to explore how the impact of the Covid-19 crisis is likely to pan out for investors.
Gottschalg’s approach integrates existing data from the last Black Swan – the 2008 global financial crisis. This data combined with Gottschalg’s forecasting techniques allows for insight into how the current crisis may impact PE distributions and takedowns.
Using data from a sample of 429 PE funds between 1999 and 2008, including information about quarterly cash flows and the quarterly net asset values, Gottschalg has taken a snapshot of the performance profile of funds over a nine-year period.
Analysis of the data reveals that the global financial crisis caused a decrease in annual private equity distributions of 65 per cent and a decrease in takedowns by 20 per cent.
Gottschalg has performed a similar set of calculations using a broad sample of buyout funds raised over the decade prior to the Covid-19 crisis, in this case 382 funds raised between 2010 and 2019.
To set context in real terms, he has run the model from the perspective of a limited partner with an USD 10 million commitment to each of these funds.
“As with the 2008/9 data, we run our forecasting model, assuming that the recent effect of the Coronavirus crisis on overall equity markets will remain in place for some time,” commented Gottschalg.
He continued: “The model shows the corresponding performance metric on a vintage by vintage basis, which documents projected cash distributions over the 12-month period of USD444 million, as well as takedowns in the amount of USD374 million.”
“It’s important to note that experience with the global financial crisis has shown that projections need to be adjusted for the unpredictable impact of the crisis,” added Gottschalg.
