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Private equity has been more reactive to market conditions for the past couple of years and if that trend keeps up, sources say it may start to impact pacing models for investors.
Private equity prides itself on being uncorrelated to macroeconomic trends, but those have been almost impossible for the asset class to avoid. In 2021, following the pandemic, private equity had a record year — merger and acquisition activity was high, fundraising went well and returns were solid. But rising inflation coupled with an abrupt increase in interest rates in 2022 and 2023 have caused a slowdown in M&A activity, drops in valuations and subsequently, distributions back to investors.
Pacing models are typically designed to withstand short-term trends, but plans released by institutional investors for 2024 show that some investors are making tactical changes to provide flexibility in this new environment.
"Investors are getting fewer distributions than they planned for and at the same time they are also getting fewer capital calls," explained Junying Shen, vice president and co-head of the private assets research programs in the institutional advisory and solutions group at PGIM. "Slower cash flow in general can create planning issues for investors that have a pacing strategy and want to invest in new vintages."
There is a risk, Shen said, for investors if they aren't getting the distributions back that they anticipated that they might miss new vintages and often the funds that come to market immediately after a slowdown can be some of the best performers.
This was a lesson many investors learned in 2009, when they pulled back from the asset class in the aftermath of the global financial crisis only to watch as funds from 2010 and 2011 outperformed significantly, Shen said.
"Investors see that there is a transition happening within the economy right now and they want to be invested in that through their GPs," Shen said. "But there are cash constraints within institutional portfolios that can limit what they are able to do."
Luke Riela, principal and...