Turnover Soars as Investors Accelerate Exit from Private Equity Stakes, According to Reuters

By Rae Wee

SINGAPORE – Investors are witnessing an unprecedented wave of private equity holdings being sold in a less transparent secondary market, as asset managers offload these investments to cover losses in other areas and rebalance their portfolios.

This surge in sales is indicative of growing stress in private markets and highlights a waning enthusiasm for "alternative assets" that not long ago attracted significant investment.

Originally conceived as a lucrative, albeit illiquid, means of investing in unlisted companies, private investments are typically structured through funds managed by buyout firms. As they gained popularity, these funds expanded to include real estate and infrastructure projects.

However, since exiting these funds before maturity—typically spanning at least three years—can be challenging, fund managers in need of liquidating investments have increasingly turned to a bustling secondary market in recent months.

The discounts being offered on these stakes suggest a sense of urgency among sellers. Although precise figures on total turnover are difficult to ascertain due to the private nature of these deals, it is currently at or near all-time highs.

According to investment firm Hamilton Lane, an unprecedented $224 billion in private equity stakes has been listed in the secondary market this year through mid-November. While not all stakes have sold, analysis firm Preqin estimates that secondary transactions reached approximately $65 billion by the third quarter, approaching the total of just over $70 billion recorded in 2021, and significantly higher than previous years.

Several factors are fueling this selling trend. Some investors are in need of cash, as evidenced by the turmoil in Britain’s debt markets last September, which forced investors to liquidate portions of their private equity holdings to cover losses.

Others are looking to redeploy their capital elsewhere, signaling a decline in the perceived value of private equity funds. Additionally, pension funds that face restrictions on their allocations to private investments are among the largest sellers.

"If your allocation target is 5% and suddenly your fair market value sits at 10%, what do you do?" asked Alistair Watson, head of strategy innovation for private equity at fund manager abrdn.

The need to rebalance portfolios can arise particularly when private equity funds have outperformed public markets, as has been the case this year.

"The challenge is that when you’re attempting to sell assets quickly to achieve target allocations, you’re likely doing so in a volatile market, which can mean secondary pricing is less favorable," Watson added.

In more stable market conditions, buyers generally encounter modest discounts relative to book value. However, these discounts have recently widened significantly.

"Typically, a portfolio would trade close to book value, perhaps a 1 to 2% discount. Currently, we’re seeing high-quality portfolios trading at double-digit discounts," noted Jan Philipp Schmitz, head of Germany and Asia at Ardian, a major player in the private equity secondary market. "As a buyer, you can afford to be very selective."

While many private investments appear to have performed well on paper this year—often valued quarterly—signs of shifting sentiment are becoming evident. Reports indicate that U.S. buyout firm Carlyle Group is struggling to meet fundraising targets, and there are withdrawal pressures facing Blackstone’s widely held unlisted real estate trust, which has had to limit redemptions after reaching maximum thresholds.

Nonetheless, some investors remain satisfied with their private investments. For example, Thailand’s government pension fund has increased the proportion of its portfolio allocated to private assets from around 5% eight years ago to approximately 18% to 20% today, as per Man Juttijudata, the fund’s deputy secretary general for investment strategy and external fund management. "It provides good long-term returns with acceptable risk levels and less volatility than traditional assets," he explained.

However, research from a U.S. investment bank found that 58% of secondary-market transactions by value in the first half of 2022 involved sales made by other funds acting as investors in private equity funds. Observers expect further selling pressure to emerge.

"There are still numerous companies that seem overvalued, and I anticipate that will change in the first half of 2023," stated Vikas Pershad, portfolio manager for Asian equities at a British fund manager in Singapore. "I believe there’s a need for a more realistic perspective."