Funds Scramble To Get Out Of Their Private Equity Investments
SINGAPORE, Dec 19 (Reuters) – According to investors, asset managers are cashing out their stakes in private equity at a record pace in an opaque secondary market in order to offset losses elsewhere and rebalance portfolios.
The wave of selling is the most recent of numerous signals of stress in private markets, and it is another indicator that investors are starting to fall out of love with “alternative assets” which only lately were bringing in capital. This is the latest of several signs of stress in private markets.
Private investments, which are often structured into funds that are managed by buyout firms, are conceived as an illiquid but lucrative technique of gaining access to unlisted companies. As a result of their growing popularity, they have broadened their scope to include initiatives involving property and infrastructure.
However, because it is difficult to withdraw money from such funds before they mature, which typically takes at least three years, money managers who need to cash out use a secondary market that has been picking up steam over the past few months.
The discounts that are being offered give the impression that there is a rush to get rid of the inventory, and although overall turnover is difficult to estimate due to the fact that agreements are made in secret, it is at or near record levels.
According to estimates provided by the investment company Hamilton Lane, a record-breaking $224 billion worth of private equity holdings have been made available on the secondary market this year up to the middle of November.
Although not all of them have been sold, the research company Preqin believes that the value of secondary trades up until the end of the third quarter was around $65 billion. This is a significant increase from prior years and is very close to reaching the years total of just over $70 billion in 2021.
According to players in the market, there are numerous variables driving sales.
There are certain investors that require cash. The participants in the market alluded to the example of the catastrophe that occurred in Britain’s debt markets in September. At that time, investors wanted to cover losses and went to their private equity holdings to do so.
Others are looking to invest their money elsewhere, which is a clear indication that private equity firms are no longer held in such high esteem.
Then there are pension funds that are prevented from participating because they are required to comply with their limits on the proportion of their assets that may be invested in such activities. They are among the biggest sellers.
“If your allocation target is 5% and suddenly you have the kind of fair market value sitting at 10%…, what do you do?” said Alistair Watson, head of strategy innovation for private equity at fund manager abrdn plc.
When private equity funds have fared better than public markets, like they have so far this year, the need to sell assets in order to rebalance the portfolio may arise.
“The challenge is that when you’re trying to sell assets relatively quickly to fix target allocation, you’re generally doing that sale in a period of volatility and therefore secondary pricing may not be the best,” said Watson.
When conditions are more stable, buyers may often negotiate small reductions off of the book value, but in recent times, these have significantly expanded.
“Usually, you would have a portfolio trading close to book value… maybe a 1 to 2% discount. Today we’re seeing these top-quality portfolios trading at double digit discounts,” said Jan Philipp Schmitz, head of Germany and Asia at Ardian, one of the biggest players in the private-equity secondary market.
“As a buyer, you can be very, very picky,” he said.
On paper, a good number of private assets, which are normally appraised once every three months, seem to have done quite well this year. However, there are indications that popular sentiment is shifting.
According to a story in the Financial Times, the American buyout firm Carlyle Group is having trouble meeting its fund-raising commitments.
In addition, the Blackstone real estate trust, which is held by a large number of investors but is not publicly traded and has increased in value so far this year, is under withdrawal pressure. After reaching certain limitations, it places restrictions on the ability to withdraw money.
Despite this, there still remains a significant number of players who are satisfied with having private investments.
According to Man Juttijudata, deputy secretary general of the fund’s investment strategy and external fund management group, Thailand’s government pension fund, for example, has allowed the proportion of its portfolio invested in private assets to grow from approximately 5% eight years ago to approximately 18% to 20% in recent years. This growth was permitted by the fund’s investment strategy and external fund management group.
“It gives good returns in the long term, with acceptable risk levels and less volatility than the main assets,” he said.
Nevertheless, research conducted by the American investment bank Jefferies indicated that during the first half of 2022, 58% of secondary-market deals in terms of value were sales made by other funds that were acting as investors in private-equity funds. Participants are witnessing an increasing amount of selling pressure.
“There are still many companies that I feel are marked too highly, and I think that will change in the first half of 2023,” said Vikas Pershad, portfolio manager for Asian equities at British fund manager M&G Investments in Singapore.
“I think people just have to get more realistic.”
online sources: reuters.com, preqin.com, abrdn.com, hamiltonlane.com, mandg.com
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