Two weeks ago, we wrote about the cash shortage that is developing in the VC and private-equity industry as demolished investors such as endowments and pension funds try to cut back on commitments. At the time, most sources said the crisis was still affecting only third-tier firms.
This may still be the case. But the strategy that some overcommitted endowments are using to try to reduce VC and PE commitments–selling at a huge loss in the secondary market–appears to be encountering problems, namely that there are few buyers. Thus, some Limited Partners are reportedly urging funds to delay capital calls and reduce fund sizes.
Even if these LPs do not actually default on their commitments, the net effect will be the same: Less cash available for VC and PE firms to invest in portfolio companies. And the situation is likely to continue to get worse as the crisis hits other big VC investors, such as pension funds.
Dow Jones: Limited partners of all types are running into a private
equity-related cash crunch that is causing them to take radical steps,
such as asking GPs to delay capital calls, selling down portions of
other asset classes, or looking to sell private equity assets on the
secondary market, even at drastically reduced prices.
The growing list of investors known to be considering such steps
include public pension California Public Employees’ Retirement System,
as well as university endowments Brown University, Columbia University
Investment Management Co., Duke University Management Co., Harvard
Management Co., and University of Virginia Investment Management Co.
Institutions such as these have been hit hard by broad declines in
value across many of the assets they invest in, from the stocks and
bonds of U.S. companies to assets in emerging markets. That has meant
the less liquid alternative assets in their portfolio, which don’t
reflect the change in environment as quickly, have become a much
larger part of their overall portfolio.
At the same time, LPs who had been relying on capital coming back from
private equity investments they’ve already made to fund capital calls
for new funds can no longer rely on that money.
As a reminder, these are not boneheaded “me too” endowments we’re talking about. These are the big dogs:
Harvard Management and Duke Management have both hired Cogent Partners
to help offload large portions of their private equity portfolios on
the secondary market, according to secondary buyers. Bids for the
Harvard portfolio – which will be worth between $1.3 billion and $1.5
billion – are due this week, according to a source at one secondary
firm… Duke University Management is reported to be selling anywhere between
$1 billion to $2 billion in private equity fund assets…
Meanwhile, Columbia University has tapped UBS to help offload at least
$600 million of assets from its private equity portfolio. University
of Virginia Investment Management also has not ruled out selling
portions of its private equity portfolio on the secondary market.
However, with few secondary deals actually closing these days, there’s
no guarantee that these LPs will find buyers for their assets at the
prices they seek, if at all.
See Also: Cash Panic Sweeping VC and PE Industries
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