Slowdown in PE Exits, M&A Activity Leads to Smaller, Slower Distributions to Public Pension Funds

Some funds with significant allocations to private equity are facing a negative cash flow from PE distributions. 



In 2023, public pension funds saw a slowdown in distributions from their private equity portfolios due to a weakened exit environment and slowdown in mergers and acquisitions. At least two pension funds saw negative cash flow in their PE portfolios, as distributions from these portfolios were outweighed by contributions to them.
 

Both trends come after a slowdown in private equity exits, as some PE firms are choosing to hold onto their portfolio companies longer, with valuations lower than a couple of years ago.  

One such investor is the Oregon Investment Council, which manages investments on behalf of several  Oregon-based trust funds, including the Oregon Public Employees Retirement Fund. As of December 31, 2023, the OIC allocates 28% of its assets, $26.4 billion, to private equity, well above its target allocation of 20%. The fund reported at its January 24 investment committee meeting that 2023 was the first year since the global financial crisis of 2008 and 2009 in which its private equity portfolio had negative cash flow.  

In 2023, the OIC’s private equity portfolio had distributions of $2.4 billion, with capital calls of $2.9 billion, resulting in net contributions of $518 million. Of the OIC’s private equity holdings, nearly 70% were in buyouts. 

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Weak Cash Flows From PE 

Other pension funds are seeing weak cash flow from PE portfolios, including Massachusetts Pension Reserve Investment Management, which needed an uptick in private equity cash flow in 2023’s fourth quarter to overcome negative cash flows in the second and third quarters. 

In its January 30 board meeting, MassPRIM’s investment committee announced that its private equity portfolio returned $192.92 million in the fourth quarter. Cash flow for the full year came in at $55.39 million, with distributions of $1.7 billion, but the total paled in comparison with 2021’s full year distributions of $4.1 billion. 

“Ending with a positive cash flow quarter in Q4, which turned the whole CY 2023 positive, is a strong, healthy sign,” said Michael McGirr, director of private equity at MassPRIM, via a spokesperson.  

For older pension funds, especially those that are cash-flow negative, investing in illiquid assets that can have long periods without distributions can be risky. One former pension fund CIO said his fund could not allocate anything to long-term illiquid investments because it could not afford to keep assets tied up for so long.  

But private equity investments are not bad news for everyone. In a January 31 webinar hosted by CIO, “Investment Returns and Monetary Policy,” Andrew Junkin, the CIO of the Virginia Retirement System, said, “Our private equity program is very mature. We actually were cash-flow positive. We had more distributions than we had capital calls, and that feels like a pretty big win in [this] kind of environment.”  

Weak Exit, M&A Environment for PE 

Private equity exits in middle market companies hit their lowest volume in more than a decade in the third quarter of 2023, according to data from Pitchbook.  

According to data from S&P Global, the number of PE deals completed last year declined to their lowest levels since 2019: 12,016 private equity and venture capital deals, with a transaction value of $474.14 billion, down from a high of 20,887 deals and $1.18 trillion in transaction value in 2021.  

Private equity firms are also holding onto their investments for longer, as valuations today are not as high as they were in 2020 and 2021, That has led to a domino effect of less cash flowing to the portfolios of public pension funds, because when exits are not happening, funds are not able to reinvest or otherwise reallocate the funds. 

Related Stories: 
Public Pension Funds Shifting Public Assets to Private Equity, Real Estate, According to Milliman 

Pennsylvania SERS Commits $220M to Private Equity, Real Estate 

Why Private Equity Is Still Dogging It 

 

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