Huge institutional investors are selling off private equity stakes, forcing prices in the limited partnerships down to “fire sale” levels.
Bloomberg reports that as much as $100 billion of private equity funds may be available in secondary sales, a level that risks “overwhelming available pools of capital.” In short, there is far more interest in selling private equity stakes than buying them. Harvard’s endowment, for instance, is “in talks to sell $1.5 billion of limited-partnership holdings in leveraged buyout funds,” according to Bloomberg.
Bloomberg explains what this selling is doing to prices:
“One financial institution recently held discussions about selling more than $100 million in private-equity stakes in a fund run by New York-based KKR at a discount of about 50 per cent, a person briefed on the talks said. A sale hasn’t yet been completed. A $50 million investment in a fund run by Terra Firma, the London-based LBO firm led by Guy Hands, is also for sale, with bids implying a discount of about 50 per cent, said a person involved in the process. “
What’s driving the selling?
Low distributions. Private equity funds have written down billions of assets, putting pressure on their distributions. Now that they aren’t spinning off as much cash, investors such as university endowments, are forced to sell to monetise the investments.
Global economic decline. The outlook for private equity returns in 2009 is seen as increasingly dire. While an economic downturn can create opportunities for private equity firms to profit by buying companies at distressed levels, those investments often take years to turn around. There will be a thin market for private equity firms to exit investments next year, and operating companies are likely to suffer from diminished profits amid a global economic slowdown.
The ‘Denominator Effect.’ Institutional investors are often required by law or by charter to maintain a mix of investments that doesn’t allow thinly traded asset classes to account for too much of the portfolio. When the value of broadly traded corporate bonds and equities decline, the relative size of the private equity stake in the portfolio increases. To maintain the required balance, the institutional investors need to sell off positions.