Turnover rises as funds rush to exit private equity stakes

• Record $224 billion secondary market deals – Hamilton Lane
• Rebalancing leads to forced selling – investors
• Shoppers are seeing “double-digit” discounts

SINGAPORE, Dec 19 (Reuters) – Private equity securities are being sold at a record pace in an opaque secondary market, investors say, as asset managers cash in to cover losses elsewhere and rebalance portfolios.

The sell-off is the latest of several signs of stress in private markets and is another signal that investors are starting to lose interest in “alternative assets” that have only recently been attracting cash.

Designed as an illiquid but lucrative method of accessing unlisted companies, private investments are typically structured as funds managed by buyout companies. As they have become popular, they have expanded to encompass real estate and infrastructure projects.

Yet because it is difficult to exit such funds before their maturity – usually at least three years – fund managers who need to cash in are using a secondary market that has lit up in recent months.

The discounts on offer suggest there’s a rush to get out there and, while total revenue is hard to gauge, because the deals are negotiated privately, it’s at or near record highs.

Investment firm Hamilton Lane says an unprecedented $224 billion of private equity stakes have been offered on the secondary market this year through mid-November.

Not all were sold, but analyst firm Preqin estimates the value of secondary deals through the third quarter was around $65 billion. That’s not far off the 2021 total of just over $70 billion and is much higher than previous years.

Market players claim that several factors are driving the sales.

Some investors need cash. Market participants cited the example of the collapse of UK debt markets in September, when investors had to cover their losses and turned to their private equity holdings to do so.

Others want to deploy their capital elsewhere, a sign that private equity funds are no longer as popular.

Then there are the pension funds which are forced to withdraw by the need to respect their ceilings on allocations to these investments. They are among the biggest sellers.

“If your allocation target is 5% and you suddenly kind of have fair market value at 10%…what do you do?” said Alistair Watson, head of strategic innovation for private equity at fund manager abrdn.

The need to sell to rebalance can arise when, like this year, private equity funds have outperformed public markets.

“The challenge is that when you’re trying to sell assets relatively quickly to fix the target allocation, you’re usually making that sale in a period of volatility and therefore secondary pricing may not be the best,” said Watson.

EXPANDED DISCOUNTS

In more stable times, buyers typically get modest discounts from book value, but these have recently widened considerably.

“Usually you would have a portfolio trading close to book value…maybe a 1-2% discount. Today we see these premium portfolios trading at double-digit discounts,” Jan said. 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, many private investments, which are typically valued quarterly, appear to have performed very well this year. But there are signs that the sentiment is turning.

US buyout firm Carlyle Group is struggling to meet its fundraising targets, the Financial Times has reported.

In addition, the unlisted Blackstone Real Estate Trust, which has gained in value this year, is facing withdrawal pressures. It limited withdrawals after redemptions reached the limits.

Yet many are content to hold private investments.

Thailand’s government pension fund, for example, has allowed the proportion of its portfolio invested in private assets to rise from around 5% eight years ago to around 18% to 20%, Man Juttijudata, deputy secretary general of the fund’s investment strategy and external fund management group, told Reuters.

“It gives good long-term returns, with acceptable levels of risk and less volatility than core assets,” he said.

Yet analysis by US investment bank Jefferies found that 58% of secondary market deals by value in the first half of 2022 were sales by other funds acting as investors in private equity funds. . Participants are seeing an increase in selling pressure.

“There are still many companies that I think are overpriced, and I think that will change in the first half of 2023,” said Vikas Pershad, portfolio manager for Asian equities at UK fund manager M&G. Investing in Singapore.

“I think people just have to get more realistic.”

Reporting by Rae Wee in Singapore. Additional reporting by Orathai Sriring in Bangkok; Written by Tom Westbrook; Editing by Bradley Perrett

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