At a recent annual meeting for a major private equity firm, one investor sported a T-shirt emblazoned with a pithy slogan: “DPI is the new IRR.”

To those outside the private equity world, the slogan is likely incomprehensible. But for those in the know, it’s a not-too-subtle wink at a growing shift in how buyout investors, known as limited partners, judge their general partners. 

“More than anything right now, investors are most focused on distributions,” said Warburg Pincus President Jeffrey Perlman, who shared the anecdote about the T-shirt. “It’s as simple as ‘IRR on a page isn’t money in an investor’s pocket.’”

For years, limited partners have relied on a metric known as internal rate of return—a measure of gains on future cash flows—to determine whether to back an investment.

That standard worked when cash was cheap. Now, investors are zeroing in on a different yardstick. 

So-called distributed to paid-in capital—the ratio of cash generated to what’s invested—has overtaken IRR as the most critical metric for investors. It’s gaining traction in the aftermath of higher borrowing costs and a dearth of deals, which hindered the ability of buyout shops to exit investments and return money to investors. 

The focus on cash returns is ratcheting up pressure on private equity firms to deliver in a tough dealmaking environment.

While distributions always had a role when investors evaluated investments, “it’s just gone from maybe the third number you look at to the first,” said Andrea Auerbach, head of global private investments at investing consultancy Cambridge Associates.

Five major alternative-asset managers—including Blackstone Inc., Apollo Global Management Inc., Carlyle Group Inc., Brookfield Asset Management and Ares Management Corp.—delivered about $37 billion from cashing out private equity bets last year, Bloomberg calculations show. That’s a 49% drop since 2021, the year before the Federal Reserve began raising interest rates.

At KKR & Co., distributions fell to $9.3 billion in 2023, down 42% from the year before. The firm didn’t report private equity distributions separately prior to 2022.

Apollo’s distributions—which include infrastructure and real estate—plunged 65% to $6.7 billion from two years ago, while Blackstone’s dropped by more than a quarter compared with 2021. 

“Performance revenues were down as expected in the context of limited realizations, as we choose to sell less in unfavorable markets,” Blackstone Chief Executive Officer Steve Schwarzman said on a conference call with analysts last month.

The private equity industry is banking on the Fed cutting rates this year, which would spur buyers to tap debt to grease purchases—and ultimately return money to limited partners.

Distribution Drought
There are signs the deal freeze may already be thawing. Blackstone generated $15.8 billion from exiting investments across all its businesses in the fourth quarter, up 17% from a year earlier—fueling an unexpected increase in profit. 

But that wasn’t enough to ease the distribution drought. The distribution yield for U.S. private equity firms totaled 9% last year—below the 22% average figure in the past 25 years and the lowest level since the 2008 financial crisis, according to estimates by Cambridge Associates. 

Private equity investors “don’t have a lot of money coming back from their private programs,” Auerbach said. “And so they’ve started to focus on managers who have given money back.”  

For their part, buyout firms are resorting to creative methods to drum up liquidity without selling assets at a discount.

That includes extending the ownership period for assets through continuation funds and selling minority ownership in portfolio companies rather than pursuing a full sale. In some cases, they’re shifting assets between funds with different strategies.

In 2023, Brookfield Asset Management’s private equity business delivered its highest distributions in three years. The firm generated $5.7 billion from divesting assets, including the sale of Westinghouse Electric to Brookfield’s renewable energy arm and Cameco Corp. The firm also sold interests in six smaller businesses, including a stake in Everise Holdings to Warburg Pincus. 

For many limited partners, such as endowments, pension funds and family offices, distributions aren’t only a measure of an investment’s success. They also fund pensions, philanthropic activities and other endeavors, Auerbach said in an email.

Private equity firms have a different motivation for distributing cash—freeing money for investors to commit to future funds.

“Transaction volumes should pick up,” Brookfield CEO Bruce Flatt said on a conference call with analysts this month. He predicted an uptick in deals will allow managers to exit bets, return capital to investors—and generate fresh cash for new funds.

This article was provided by Bloomberg News.