We’ve been reporting about the growth of a secondary market for private equity stakes as big institutional investors, finding themselves short of liquidity, attempt to sell off their investments. Now, however, a new report suggests that bids for the shares may have become so low that the market–which had been predicted to grow rapidly–may actually freeze up and remain flat compared to last year.
- Late last year, the secondary market in private equity began to slow. It had been on pace for around $18 billion in deals. In fact, only an estimated $14 billion got done. Although market watchers are saying as much as $30 billion may be offered this year, the deal volume could be half that because of disputes over pricing.
- The dispute over prices will probably sound familiar to you. Would-be buyers value funds according to current market conditions and projections about the prospects of the portfolio companies. The sellers, however, often have these booked according to the last quarterly report of the fund. This means sellers would have to take a large write-down on the sale of the stake. Sometimes avoiding making a sale allows the holders of the stake to avoid taking a loss. Sound familiar? Yep. It’s the same “toxic asset” assessment we hear about CDOs on bank balance sheets.
The situation is getting worse, not better. Book valuations are moving away from market-based valuations.
“Many buyers have been waiting for year-end valuations to come out, saying that once those writedowns are reflected in LPs’ own numbers, doing deals will be easier. But with the Dow Jones Industrial Average now well below where it was at the end of 2008, the pricing gap may stay where it is for at least another quarter,” Daniel Hausmann of Private Equity Beat explains.
(Confused by the graphic? OK. Here’s the story. Back when the boom was still going strong, the Wall Street Journal profiled private equity prince and Blackstone founder Stephen Schwarzman. The profile mentioned that his cook spent $400 in a weekend on crab claws for Schwarzman’s lunches. I promptly had our graphics at DealBreaker guy photoshop crab claws where Schwarzman’s hands would be. This is just a further abstraction of the idea, with Schwarzman–representing all of private equity–crawling into a trash can.)
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