Sources in the VC industry are hearing that some VC firms and PE firms are beginning to see defaults or delays on capital commitments from Limited Partners (endowments, pension funds) who are strapped for cash. We have not yet confirmed any of this, but here are more details.
The potentially larger story behind these reports is that some of the largest endowments and pension funds may have suffered enormous losses in the past few months, at least on a mark-to-market basis. For example, one of our sources has heard that most major university endowments (Harvard, Yale, Princeton, etc.) are down 25%-30% on a mark-to-market basis. Harvard is also reportedly trying to dump 1/3 of its private equity holdings to raise cash, which would be a seriously distressed move. [See Private Equity Online report below]
Here are notes from two VC conversations. Again, no details confirmed:
The most agressive LPs have been hurt the most. For example, a rumour is circulating that Columbia’s endowment fund is illiquid [can’t raise the cash it needs to fund current commitments]. Harvard is trying to sell 1/3 of its private equity portfolio at a steep discount in a secondary offering. You would only do this today if you are really in deep doo doo.
The market price for LP positions in VC funds on average is 75 cents on the dollar. Limited partnership positions in PE funds are selling for 50-60 cents on the dollar. This suggests that $50-$100 billion in value has gone in the past few months from PE funds alone.
The major university endowments are reportedly down 25-30% on a mark-to-market basis [sounds extreme, but certainly possible]. Big universities are heavily in commodities, PE, VC hedge funds, and very little in bonds. They are getting killed across the board
Pension funds are a little bit less aggressive but they also may be more exposed soon.
This certainly makes sense. Many endowments have been following Yale’s example in recent years and are heavy on private equity, real-estate, commodities, and hedge funds, and all of these asset classes have been killed.
UPDATE: The WSJ spoke with Todd Miller, who runs a firm specializing in secondary marketing of private-equity partnerships. Todd’s comments certainly seem to confirm what we’re hearing. Excerpts:
Private Equity Analyst: The press has reported that a number of investors, including Harvard Management Co., are dealing with cash-flow issues in their private-equity portfolios, thanks to their large, relatively illiquid alternative-asset portfolios and the prospect of no capital flowing back into them as deal-making remains difficult. What’s going on?
Todd Miller: I can’t tell you how widespread it is. You have LPs who are overcommitted, and these are the premiere investors in private equity out there. The people who’ve been around a long time are the ones who are getting squeezed the most. People had self-funding PE programs and when you map out no distributions for the next two years and project capital calls to occur, PE becomes a massive portion of an entire program. The next shoe to drop may be the pension funds. I think we’re in the early innings of this. This is not just a short-term problem.
PEA: What’s going on with pricing for secondary sales? Are any deals getting done?
Miller: Pricing for secondary interests has dramatically decreased. Pricing has gone from 85% of NAV in the first half of 2008 to around 50% to 60% of NAV based on June 30 financial statements recently. Deals are still getting done, but it’s a major challenge.
PEA: The secondary market is fairly small. Are there enough buyers for all the supply that’s going to hit?
Miller: There’s going to be a supply/demand imbalance because there’s not enough capital to absorb all the secondary deal flow that’s coming over the next 12 months. We could see a dozen deals north of $1 billion in the next 12 months. That’s the thing that I don’t think people are getting. People who think they can tap the secondary market may be in for surprise.
Harvard Management Company is looking to unload roughly $1.5 billion in private equity stakes in the secondary market.
A secondary market source described the university endowment, which had $36.9 billion in assets as of 30 June, as a highly sophisticated limited partner making a proactive decision to seek liquidity and rebalance its portfolio based on cash flow models.
Although the volume of supply in the secondary market has risen of late, secondary investors expect it to surge further in the first half of 2009 as more LPs make a similar move to access needed liquidity…
Harvard’s secondary sale will drive down prices in the secondaries market because it will take $1.5 billion of demand out of the market at a time when supply is not rising, the investor added.
For the 2009 fiscal year, Harvard has a target private equity allocation of 13 per cent up from 11 per cent for the 2008 fiscal year. The endowment currently has roughly $4.5 billion in private equity commitments, according to sister data web site Private Equity Connect.
The Wall Street Journal reported today that the Cambridge, Massachusetts, school is seeking to drop about $1.5 billion in partnerships managed by companies including Bain Capital LLC.
Endowments such as Harvard’s, the world’s largest university fund, and pension-plan managers pumped a record $1.01 billion into buyout firms in 2006 and 2007 as they chased returns that exceeded those available from public stocks and bonds. They are scaling back as the credit shortage makes it almost impossible for buyout firms to acquire and sell companies, crimping investment profits.
Commitments to private-equity pools fell to a three-and-a- half year low of $82.3 billion in the third quarter, according to researcher Private Equity Intelligence Ltd. in London.
We will be doing more research on this. All help appreciated and kept confidential.([email protected], [email protected]).
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