The Aggregation of Capital Distribution

Distributions received from underlying assets in secondaries funds have to be managed carefully and with great precision. Secondaries managers have a many-to-many problem which we have discussed in an earlier post, and these distributions have to be attributed to the rightful entity, deal, or fund. Even after successfully receiving these distributions, the managers face challenges in accurately aggregating them for reporting the returns (IRR, MOIC) of the deals and portfolios.

Asset managers in general managing illiquid investments have to accurately account for the distributions they receive from investments in underlying assets. For drawdown funds, these distributions received by funds  have to be kept segregated; to be run through the waterfall and further distributed to their investors. Secondaries managers have a bigger responsibility due to the unique nature of their business.

Here, we will discuss the possible types of distributions and their effect on the portfolio.

Types of Distributions

The distributions received by the secondaries manager can either be:

1. Cash Distributions
2. In Kind Distributions of private or public stocks, or other assets

Each of the above distributions can also be:

1. Regular Distributions – where cash or a stock was distributed to the fund
2. Deemed Distributions – where the distribution was netted out against a capital call 
3. Short Term Netted Distribution – where distribution occurred during a period where it can be reused for further investments
4. Recallable Distribution – returned capital that has been distributed which can be recalled by the manager 

Each of these different types of distribution can increase the operational challenge of how they are treated and recorded by the asset manager. Each of these distributions can also change the liquidity profile, the IRR, and the capital available for reinvestment for any fund.

The most difficult to manage these distributions are the in-kind distributions, where a private stock is distributed by a position held in the portfolio.

An example: 

-Here are 3 Underlying Funds; UF1, UF2, UF3. UF1 and UF2 are held in deal D1, and UF1 is also held in a second deal, D2.

-UF1, UF2, and UF3 all distribute a private stock, PRS1, at different distributions and different underlying values.

-Private stock PRS1 then goes on and converts to public stock PUS1.

-At this point, the secondaries manager sells 50% of PUS1 into the public markets.

The above is a common occurrence in managing a portfolio of secondary assets. This leads to questions of what the return on the deal was and what the return on the individual assets that were part of the deal was. Often, the return on the deal is not explained by the return on the individual assets that were acquired as part of the deal due to the above complexity.

Pepper was created as a solution for solving these many-to-many challenges that managers face while managing a rapidly evolving portfolio with complex underlying holdings. The flexibility that Pepper provides helps manage the waterfall calculations for each portfolio, at both a deal level and a fund level. 

To learn more about Pepper and our offerings, reach out to us or request a demo on our website today.