Cash Distribution Dynamics in Private Equity Buyout Funds: A Deep Dive into Market Size Differences

Merrick McKay – Patria, Head of Private Equity in Global Private Markets Solutions

Our research suggests that the average “cash yield” generated by small/mid-market buyout funds is both higher and more consistent than that observed in the large/mega-cap market.

Notwithstanding the continued concentration of PE fundraising targeted at large & mega-cap buyout funds ($5bn+)[1], sophisticated investors are increasingly attracted to the small & mid-market segments due to factors such as: strong historical performance; genuine sector specialisation; lower competition and leverage; higher growth; and lower correlation to public markets. Can higher and more consistent through-the-cycle cash distribution activity be added to this list of attractions?

The strong appeal of the PE buyout market to long-term asset allocators has resulted in a 4x increase in global AuM since the GFC in 2008[2]. However, the significant slowdown in distributions back to investors since 2022 is one significant factor behind:

• a challenging fundraising environment; and
• pressure being put on GPs to seek liquidity, at a time when exit dynamics are certainly less conducive than in the period pre- and immediately post-Covid.

Indeed, in McKinsey’s 2025 survey[3] of the world’s leading LPs, 2.5x as many LPs ranked distributions to paid-in capital (DPI) as a “most critical” performance metric compared with three years ago.

As PE emerged from its slump post-GFC, the period to 2017 showed a combination of strong IRR performance and a surplus of distributions (from mature funds) over capital calls (to newer funds). This period of positive net capital distributions contributed to the sharp increase in buyout fundraising from 2016-19. Since 2019 though, investors have generally been in a “net capital called” position, at a time when many LPs were expecting to be funding their increased PE allocations from continued strong distribution activity.

This portfolio ‘indigestion’ is clearly illustrated when one compares annual distributions against the unrealised value of buyout portfolios at the beginning of that year, particularly since 2022. With the exception of the post-Covid correction in 2021, overall distributions have shown only modest growth whilst portfolio Net Asset Values have risen significantly since 2017.

Given the importance of GPs having to generate growth and return cash to investors, a key metric Patria GPMS analyses and tracks is the implied “cash yield” of our mature portfolios and what we generate for our investors through portfolio management. This is defined as annual investor distributions as a percentage of a portfolio’s unrealised value (opening NAV).

This analysis for buyouts globally shows that whilst the long-term average weighted cash yield from 2010-23 is a healthy 24%, the 28%+ achieved in the ‘champagne days’ of 2013-17 was not to last, with the cash yield dropping to 21.7% from 2018-23 (and around 15% in 2022-23). Fortunately, initial data indicates that 2024 was a better year for distributions, with global buyout-backed exit value having increased by 34% in 2024 over 2023[4].

Our analysis of the Patria GPMS European and US buyout portfolio from 2018-24 suggests that the dynamics of exit activity and distributions to investors are not consistent across the entire buyout market with respect to fund size though.

Our Primaries buyout portfolio currently consists of 170+ funds, at various stages of their lifecycle, with 1,300+ underlying companies. This large sample set of funds can be categorised as follows:

Our analysis of the implied cash yield of these cohorts of funds, from 2018-24, results in two significant observations as shown in the chart below:

1. the average[5] annual cash yield was significantly higher for the Small / Lower Mid-Market (“LMM”) (24.8%) and Mid-Market (25.5%) buyout fund cohorts than for Large/Mega-cap funds (21.0%); and

2. the average annual cash yields observed in the Small/LMM and Mid-Market cohorts had significantly lower annual volatility than seen in Large/Mega-cap funds:

• in only one year (2019) did the Large/Mega-cap funds generate a higher cash yield than the Small/LMM and Mid-Market funds, with 2020 showing broadly similar cash yields across all cohorts
• in 2018 and 2021-24, the average cash yield of the Small/LMM and Mid-Market funds was more than 7% higher than for Large/Mega-cap funds

Why might funds focusing on the small and mid-market buyouts show greater persistency of LP distributions versus large and mega-cap funds? We believe the answer lies in the greater breadth and depth of exit paths open to small and mid-market buyouts:

• Large and mega-cap buyouts (typically valued at $1bn+) are heavily reliant on IPOs and/or the syndicated loan market (being able to fund very large financial-sponsored investments) for exits. Based on our data, it is no coincidence that the significant drop in average cash yield for this cohort, from 25.5% (2018-21) to 14.9% (2022-24), corresponded to the average number of European & US buyout-backed IPOs dropping from 80 to 15 per annum over the same period[6]. Furthermore, the ramp-up in global interest rates from 2022 to 2023 (an increase of 500+bps in the US) had a particularly dramatic impact on transactions requiring high leverage, following almost a decade of relatively cheap debt.
• Small and mid-market buyouts have greater exit optionality:
  • there are more strategic/trade buyers able to acquire “smaller” companies than larger ones;
  • large and mega-cap buyout funds are active buyers of mid-market PE-backed businesses, particularly given the ‘dry powder’ to deploy from these funds, as many buyout companies are ‘sold up the food chain’; and
  • the advent of Continuation Funds, secondary-backed vehicles established to acquire single assets of PE funds, has opened-up a major new exit route for GPs (particularly in the small and mid-market buyout space where secondary sponsors have less requirement to syndicate).

The buyout fund cash flow dynamics in the US and Europe that we have observed in our Primaries portfolio provides evidence that higher and through-the-cycle distribution activity of the small and mid-market segments is something that needs to be considered by institutional investors when looking to construct and manage their PE portfolios. It adds further weight to our view that the small and mid-market buyout space is increasingly more attractive and ‘all-weather’ in nature than the large and mega-cap segments.

References:

[1] Preqin: PE funds $5bn+ represented 49% of global PE fundraising in 2024, vs 42% in 2021

[2] Preqin. Global Buyout funds AuM: $4.0tn in June 2024 vs $1.1tn in December 2008

[3] McKinsey & Company: Global Private Markets Report 2025. January 2025, n=333

[4] Dealogic

[5] We have used a simple, rather than weighted, average for the purposes of this analysis as a proxy for an investor making the same size commitment to a Primary fund, irrespective of the size of the fund – this provides a more comparable basis of analysing different fund size cohorts.

[6] Preqin