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Institutional Investors Sell Private Equity Stakes at Discounts Amid Liquidity Concerns


US investors sell private equity stakes at discounts amid liquidity crunch, with 99% sold at or below value last year.

By Max Weldon

4/4, 01:25 EDT

Key Takeaway

  • US institutional investors are selling private equity stakes at discounts, with 99% sold at or below net asset value last year.
  • The trend is driven by a need for liquidity amid fewer traditional exit options and obligations to fulfill payouts.
  • Rising interest rates contribute to the shift towards fixed-income assets, exacerbating discounts in the secondary market.

Liquidity Concerns Rise

In a recent shift that underscores growing concerns within the financial sector, US institutional investors, led by pension funds and endowments, are increasingly offloading their private equity holdings at discounted rates. This trend, as reported by Jefferies, highlights a significant move towards liquidity, with 99% of private equity holdings sold at or below their net asset value on the secondary market last year. This marks a stark increase from 95% in 2022 and 73% in 2021, indicating a growing apprehension towards the illiquid asset class.

Forced Hand

The move towards the secondary market comes as traditional exit strategies for private equity, such as stock listings and mergers and acquisitions, have dwindled. This, coupled with the obligation of many pension plans to fulfill payouts to their beneficiaries, has forced these institutions to seek quicker liquidity solutions. Richard Ennis, co-founder of consultancy EnnisKnupp, pointed out, “Public pension funds have for many years poured money into private equity on the premise that it was high return and low risk... They are now discovering that PE is no magic bullet and liquidity does matter.”

Overallocation and Rebalancing

The trend towards overallocation in private equity is notable, with public pension funds in North America increasing their average asset allocation to this class from 8% to 11% over the past three years. This overallocation has led to a surge in secondary market sales, with transactions hitting $112bn last year. The $137bn New York State Teachers’ Retirement System exemplifies this shift, having sold 34 private equity holdings at a significant discount as a "rebalance measure."

Interest Rates and Discounts

The rise in interest rates has further complicated the private equity landscape, undermining portfolio values and pushing investors towards fixed-income assets with better yields. This shift has contributed to the discounts seen in the secondary market, as buyers become increasingly reluctant to pay previous multiples in a higher interest rate environment. Todd Miller, Global co-head of private capital advisory at Jefferies, noted, “You have a buyer community saying, ‘Wait a minute, interest rates are much higher. I am not willing to still pay the same multiple.’”