Stay informed with free updates
Just sign up for private equity myFT Digest — delivered straight to your inbox.
U.S. institutional investors are increasingly selling their private equity holdings at a discount to reduce their exposure to illiquid asset classes.
According to Jefferies, large investors, led by pension funds and endowments, sold 99% of their private equity holdings in the secondary market for less than net asset value last year, compared to the investment bank's 2017 figures. This is the highest amount since we started tracking this. This number was 95% in 2022 and 73% in 2021.
Recent curbs on stock listings and mergers and acquisitions, traditional means for private equity investors to exit a business, have forced investors to increase their use of secondary markets.
Many pension plans are also required to make payments to beneficiaries, forcing them to turn to the secondary market to raise cash more quickly.
“For years, public pension funds have poured money into private equity on the basis of high returns and low risk, while illiquidity was seen as a non-issue,” said Co-founder of consultancy Ennisknapp. Richard Ennis says. Pension system. “They are now realizing that PE is not a silver bullet and that liquidity is important for investors with large dividend requirements.”
North American public pension funds allocated an average of 11% of their assets to private equity last year, up from 8% three years earlier, according to financial data provider Preqin.
“In general, many institutional investors are over-allocated to private equity based on their target portfolio allocation strategies,” said John, a partner at Boston-based private equity brokerage Monument Group. Kristin Patrinos says.
Secondary sales are booming as investors seek to reduce exposure. According to Jefferies, the global private equity secondary market reported $112 billion in transactions last year, the second highest since the bank's records began in 2017.
Rising interest rates have eroded the value of private equity portfolios and contributed to secondary market discounts as investors flock to fixed income assets with improved yields.
“For many LPs that are over-allocated to private equity or have liquidity issues, having cash on hand through secondary sales is a sure thing,” a public fund executive told Limited.・Institutional investors known as partners were mentioned.
One example is the $137 billion New York State Teachers Retirement System, which sold 34 privately held shares totaling $3.5 billion on the secondary market late last year.
The pension scheme said the deal acted as a “rebalancing measure” to reduce its allocation to private equity from 12% last September to a targeted 9%.
The prevalence of discounts in the secondary market is in contrast to previous years, when low interest rates boosted the value of private equity-owned companies and gave sellers bargaining power.
“The buyer community is saying, 'Wait a minute, interest rates are higher.' They're still not willing to pay the same multiple,” said Todd Miller, global co-head of private capital advisory at Jefferies. , referred to the company's price relative to its earnings.
Discounts in the private equity secondary market have narrowed in recent months as the Federal Reserve halted interest rate hikes and threatened to cut them.
“There are enough things in LPs' portfolios that can be priced at a smaller discount than they currently are, and that makes them feel good,” Miller said. “There's actually a lot of secondary transactions going on.”
Many sellers wanted to get rid of illiquid assets, so they had little choice but to accept a lower price. Executives at a second public fund say they sold a private equity portfolio on the secondary market last year at a “deeper than expected” discount because the plan's board felt “concerned” about its cash flow. Stated.
“I could have charged more if I hadn't been in such a hurry,” he says.
Additional reporting by Antoine Gara in New York
