Investors claim that private equity stakes are being sold in an opaque second-hand market at a record pace as asset managers liquidate positions to make up for losses somewhere else and rebalance portfolios.
The recent wave of sales is just one of several indicators of market stress in private markets, and it also shows that investors are starting to lose interest in “alternative assets,” which were only recently bringing in money.
Private investments are frequently organised into funds managed by buyout firms and were originally designed as an illiquid but rewarding way to access unlisted companies. They have grown to include building and infrastructure projects as they have grown in popularity.
Money managers must use a second-hand market that has just exploded because it is difficult to leave such funds before maturity, which is typically at least three years.
Since sales are negotiated discreetly, it is difficult to estimate total turnover, but it is at or close to record levels given the discounts being offered.
According to investment firm Hamilton Lane, private equity shares worth a record $224 billion have been offered on the resale market this year as of mid-November.
Though not all have been sold, analytical company Preqin calculates that the total value of secondary trades through the third quarter was almost $65 billion. This amount is far greater than prior years and is not far from the projected total for 2021 of just over $70 billion.
Market participants claim a number of reasons are influencing sales.
Some investors require money. Market players used the September debt market collapse in Britain as an illustration. Investors had to pay losses and did so by using their private equity assets.
Others wish to use their money in other ways, which indicates that private equity entities are no longer held in such high regard.
Then there are funds for pensions that are compelled to leave because they must adhere to the limits on the allocations they can make to such investments. They are some of the top sellers.
As per Alistair Watson, the lead of strategic innovation for private equities at fund manager abrdn, there aren’t many options if the allocation aim is 5% and there is suddenly a kind of reasonable market value sitting at 10%.
When private equity funds outperform public markets, as they have this year, the desire to sell in order to rebalance the portfolio may arise.
The problem is that when someone tries to sell assets rapidly to fix goal allocation, they typically do so during a time of volatility, so a secondary price might not be the best, according to Watson.
In more stable times, buyers often obtain modest discounts from book value, but recently, these have drastically increased.
A portfolio would typically trade at a discount of 1–2% from book value. According to Jan Philipp Schmitz, lead of Germany and Asia at Ardian, one of the major players in the private equity secondary market, these premium portfolios are currently trading at double-digit discounts.
He said that buyers can be highly choosy.
Numerous private investments, which are normally appraised every three months, seem to have performed exceptionally well this year. However, there are indications that public opinion is shifting.
According to a story in the Financial Times, American acquisition firm Carlyle Group is having trouble reaching its fundraising goals.
Additionally, there is withdrawal pressure on the widely held unregistered Blackstone real estate trust, which has increased in value this year. After redemptions reach certain restrictions, withdrawals are prohibited.
Nevertheless, many people are content with their private investments.
Man Juttijudata, the deputy secretary general of the renowned fund’s investment strategy & external fund management group, noted that Thailand’s government pension fund, for instance, allowed the percentage of its portfolio decided to invest in private assets to increase from about 5% nearly a decade ago to about 18% to 20% today.