Private Equity / Private Equity
The exit drought and the distribution machine
Private equity's problem is not the value of what it owns. It is that it has to sell it to someone, and the someone has stopped appearing.
The model requires exits. Funds have finite lives, investors need capital back to fund the next commitment, and the entire flywheel of fundraising depends on distributions actually arriving. When exits slow, everything downstream slows with a lag, and the lag is where the stress accumulates unseen.
Three exits, all constrained
Selling to a strategic buyer requires a corporate with confidence and cash. Selling to another sponsor requires that sponsor to underwrite a price above what the seller paid, using debt that now costs more. Listing requires a public market willing to pay for an asset carrying leverage set in a cheaper era. None of these are closed, and all of them clear at prices sellers do not want to accept.
The result is a portfolio that ages. Holding periods extend, and an asset held past its plan is usually one where the plan did not work.
Unrealised gains are an opinion. Distributions are a fact, and the facts have been thin.
Continuation funds and the conflict
The mechanism that absorbed much of this is the continuation vehicle: the manager sells the asset to a fund it also manages, at a price it substantially influences, giving existing investors the choice to cash out or roll. Sometimes this is genuinely the best outcome for a good asset that needs more time. Sometimes it is a way to mark a position and pay a fee on it. Telling them apart from outside is difficult by construction.
What to watch
- DPI rather than IRR. Cash returned is the only number that cannot be modelled.
- The share of exits going to continuation vehicles.
- Secondary market pricing for LP stakes, which is the closest thing to a market price the asset class has.
- Fundraising cycles lengthening, which is the mechanism by which a distribution shortfall becomes a fee-income shortfall for the managers themselves.