Key Takeaways
- • MSCI analysis warns private-equity investors may face a cash crunch after the public-market sell-off in the first three quarters of 2022, with 2023 capital calls and distributions potentially falling below historical averages.
- • Under all three hypothetical macroeconomic scenarios, MSCI's historical sensitivity analysis suggests 2023 buyout contributions could be lower than 2016-2020 levels, with declines of as much as 35% in the stagnant long-run growth scenario.
- • Distributions from older vintages (2014 and 2015) could fall 20% to 50% in 2023 across scenarios, limiting investors' ability to fund new commitments from prior-fund proceeds.
- • Investors with mature private-asset programs may need to sell public assets at unfavorable valuations or reduce private-equity exposure through secondary sales or fewer new commitments.
Summary
MSCI's research, published December 7, 2022, examines whether liquidity has dried up in private equity following the public-market sell-off in the first three quarters of 2022. The analysis argues that private-equity investors who have committed capital face a potential cash crunch, because private-fund entries and exits have historically been sensitive to lagged public-market returns. Through the second quarter of 2022, both capital calls and distributions from private-equity funds slowed as public markets sharply declined, according to MSCI's use of Burgiss data on U.S. buyout funds from 1994 to 2021. With public equities still sharply down for the year through November 16, MSCI expects the slowdown could continue into 2023.
MSCI modeled three hypothetical macroeconomic scenarios: a positive supply shock, a soft landing, and stagnant long-run growth. Under all three, historical sensitivities imply that 2023 contributions could be lower than their 2016-2020 historical levels, for both funds launched in 2022 and those launched in 2023. MSCI attributes part of the decline to a shrinking pool of viable buyout deals amid high borrowing costs, with contributions falling by as much as 35% in the stagnant growth scenario. Distributions on older vintages could also fall below historical averages, as managers may delay exits or sell at lower prices, with 2014 and 2015 vintage distributions dropping 20% to 50% in scenarios.
The analysis highlights two implications for investors. First, investors with mature private-asset programs have typically funded young-vintage capital calls entirely from distributions of older vintages; if distributions slow more than contributions, they may need to sell public holdings at unfavorable valuations. Second, elevated funding costs could push investors to reduce private-equity exposure through secondary-market stake sales or by curtailing new commitments. MSCI concludes that the extent of further cash-flow and funding-ratio declines will depend on how inflation and the economy evolve, and recommends investors assess total plan liquidity management alongside private-equity commitments.
MSCI modeled three hypothetical macroeconomic scenarios: a positive supply shock, a soft landing, and stagnant long-run growth. Under all three, historical sensitivities imply that 2023 contributions could be lower than their 2016-2020 historical levels, for both funds launched in 2022 and those launched in 2023. MSCI attributes part of the decline to a shrinking pool of viable buyout deals amid high borrowing costs, with contributions falling by as much as 35% in the stagnant growth scenario. Distributions on older vintages could also fall below historical averages, as managers may delay exits or sell at lower prices, with 2014 and 2015 vintage distributions dropping 20% to 50% in scenarios.
The analysis highlights two implications for investors. First, investors with mature private-asset programs have typically funded young-vintage capital calls entirely from distributions of older vintages; if distributions slow more than contributions, they may need to sell public holdings at unfavorable valuations. Second, elevated funding costs could push investors to reduce private-equity exposure through secondary-market stake sales or by curtailing new commitments. MSCI concludes that the extent of further cash-flow and funding-ratio declines will depend on how inflation and the economy evolve, and recommends investors assess total plan liquidity management alongside private-equity commitments.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.