So what’s the value of a private equity stake these days?
OK. That’s a bit extreme. But several institutional funds have been taking huge discounts on funded and unfunded portions of their private equity assets.
Bids for private equity are coming in as low as zero, according to people familiar with the matter. A huge secondary market has grown for private equity as institutional investors have attempted to sell off their stakes in several of the most prominent funds. But now that market is in trouble. Buyers are valuing funded stakes at nothing and only bidding for tiny pieces of outstanding commitments.
Just yesterday a private equity stake went on the market and the highest bid was from an investment bank that offered no money upfront. This means that the seller would receive nothing for the money already contributed to the fund, a complete loss. In exchange, the bank would take over the future commitment to provide further funds.
Some private equity stakes are trading at even less than zero. This can happen when a buyer takes the funded portion of a commitment for nothing, and offers to pay only dimes on the dollar for the future commitments. The original buyer, in some cases, winds up having to make up the difference while giving up any future profits.
Why would institutional investors surrender their stakes in private equity funds at such severe discounts? In some cases, the managers have been forced to sell in order to rebalance their portfolios following declines in the values of stocks and bonds. In other cases, managers have decided that they would rather cut their losses now rather than have to fully meet the obligations they agreed to in happier times.
Of course, not all funds are trading at these extremely distressed levels. This is just a report from the bottom of the private equity market.