By: Bryan Jenkins, Vice President, Private Market Analytics, Hamilton Lane
Chart of the Month: Private Markets Annual Liquidity Ratios
January 24, 2020
January 24, 2020
This chart provides a snapshot of annual liquidity ratios segmented by various private markets strategies.
We define the “liquidity ratio” as the ratio of distributions to contributions in a given calendar year. A liquidity ratio above the dashed lined (> 1.0x) is a good thing; it means that the strategy is returning more cash than it is calling. In other words, it is self-funding.
In reviewing the liquidity ratio by strategy, a few interesting trends appear:
- Buyout, which has been self-funding since the financial crisis, has started to dip below the 1.0x line over the last two years.
- Perhaps unsurprisingly, venture capital and growth equity, despite their recent run of gains in IRR, have not posted a liquidity ratio above 1.0x in any of the last five years. And absent a heroic fourth quarter of distributions, neither is on pace to do so this year either.
- Despite struggles earlier in the decade, lately, real estate has proven to be the strategy that has most consistently provided LPs with liquidity.
- In 2017 and 2018, credit was providing more cash than it was taking in and might just continue the trend in 2019.
- And just making it into the liquidity party, infrastructure and natural resources just barely returned more cash than they took in thus far for calendar year 2019.
Let’s now turn to the question of why the liquidity ratio for each strategy is trending a certain way. To illustrate this analysis, we’ve added dots for each strategy that show the weighted average age of NAV. Think of this as a measure of the maturity of each strategy. Given the mechanics of private markets fund investments, we would generally expect older portfolios to have a higher liquidity ratio than younger portfolios.
For buyout, we observe that the weighted average age of NAV has steadily declined since 2014, coinciding with the decline in liquidity ratios. Mature buyout funds have mostly sold down their large positions and new funds have raised substantial capital in recent years, injecting youth into portfolios. Accounting for those dynamics, it seems reasonable that the industry is experiencing a decline in buyout liquidity ratios. The opposite trend is occurring in credit. There, portfolios are generally getting older (although, in an absolute sense, they are still younger than equity portfolios), coinciding with a rise in the credit liquidity ratio.
So there you have it. Credit and real estate strategies seem to be the leaders of the pack for now, while buyout, venture capital and growth equity appear to have their work cut out for them. We’ll be keeping an eye on infrastructure and natural resources to see if they can continue returning more cash than they take in.
For additional interesting private markets analysis, check out our other blog posts.