Hedge funds hit by lack of private capital outflows

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Private equity’s struggle to return money to clients is affecting hedge funds, which rely on the same pension plans, foundations and endowments to raise funds.

Hedge funds trying to raise money from institutional investors are being turned away on the grounds that institutions lack the cash to give it to them.

The difficulty is due, at least in part, to a slowdown in distributions that investors have received from private equity funds.

“The lower rate of distributions from private equity, (private) debt and hedge funds is having a knock-on effect, leading some allocators to halt new investments in illiquid funds and reduce new investments in more liquid hedge funds,” Michael Monforth said. , global head of equity advisory at JPMorgan Chase.

Buyout-backed exits fell to $345 billion last year, their lowest level in a decade, according to Bain & Co.’s annual private equity report. This has left the private equity industry with a record portfolio of 28,000 companies worth more than $3 trillion, according to the Bain & Co report, as a slowdown in trading made it more difficult to return money to their backers.

“Private equity distributions are down, the IPO market has been very tight and mergers and acquisitions have slowed,” said Nick Moakes, chief investment officer of the £36.8bn Wellcome Trust. “If they’re not going to buy you and you can’t go public, PE is scratching its head about how to make distributions.”

Hedge funds and private equity managers often compete to raise money from the so-called “alternative” allocations of institutional investors, which can also include private credit, infrastructure and real estate assets. As investors receive distributions from existing holdings, the money is recycled into new commitments.

“For the vast majority of institutions, private equity and hedge funds come out of the alternative pool,” said Sunaina Sinha Haldea, head of private equity advisory at wealth manager Raymond James.

“The lack of distributions outside the private markets portfolio will impact the ability to make new commitments elsewhere in the alternatives portfolio. . . that includes hedge funds.”

Last year, assets in the global private equity industry soared to $14.5 trillion, according to the Bain & Co report, more than triple the $4 trillion it managed a decade earlier.

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By contrast, capital inflows to hedge funds have been weak over the past decade, with investors netting cash out in five of the past 10 years, according to Hedge Fund Research.

The capital constrained environment is also having an impact on the market for new hedge fund launches.

Former Millennium co-chief investment officer Bobby Jain has been forced to scale back day one fundraising ambitions for his new hedge fund, Jain Global, ahead of its launch in July.

One hedge fund manager currently trying to raise capital said investors often cited the lack of distributions they had received from their private equity investments as a reason they would not invest. Investors were waiting to receive more money before reinvesting, they added.

“What we are seeing is a failure in the outflow of private capital, and this has a similar effect leading to a slower velocity of capital flow across all alternatives,” said Sam Diedrich, managing director at Partners Capital. . “It’s becoming a real problem.”

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