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Revenue rises as funds rush out of private equity According to Reuters


© Reuters. FILE PHOTO: A view of the city skyline in Singapore January 25, 2021. REUTERS/Edgar Su/File Photo

By Rae Wee

SINGAPORE (Reuters) – Investors say private equity holdings are selling for record prices on the opaque secondary market, as asset managers cash out cash to cover losses in elsewhere and rebalancing the portfolio.

The wave of sell-offs is the latest sign of some signs of stress in the private markets, and another signal that investors are starting to lose interest in the “alternative assets” that have only recently gained traction. cash recently.

Conceived as an illiquid but lucrative method of reaching unlisted companies, private investments are often structured into funds run by acquiring companies. As they became popular, they expanded into infrastructure and real estate projects.

However, since such funds are difficult to get out of before maturity – usually at least three years – money managers need to cash out using a secondary market that has brightened up over the past few months.

Promotional discounts show people are rushing out, and while total revenue is difficult to gauge, as deals are negotiated separately, it’s at or near record levels.

Investment firm Hamilton Lane (NASDAQ:NY) said an unprecedented $224 billion worth of private equity was offered for sale on the secondary market between this year and mid-November.

Not all have been sold, but analytics firm Preqin estimates the value of secondary transactions through the third quarter to be around $65 billion. This is not far from 2021’s total of just over $70 billion and much higher than in previous years.

Market participants say a number of factors are driving selling.

Some investors need cash. Market participants pointed to the UK debt market crisis in September, when investors needed to cover their losses and turn to their private equity holdings to do so.

Others want to deploy their capital elsewhere – a sign that private equity funds are no longer appreciated.

Then there are pension funds that have been forced out due to the need to comply with the allocation limits for such investments. They are one of the biggest sellers.

“If your allocation target is 5% and suddenly you have a fair market value type of 10%… what would you do?” Alistair Watson, head of strategic innovation for private equity at fund management firm abrdn.

The need to sell to rebalance may occur when, like this year, private equity funds outperform the public market.

“The challenge is that when you’re trying to sell assets relatively quickly to fix a target allocation, you’re usually making that sale during periods of volatility, and so the secondary price may not be as good.” best,” said Watson.

EXPANDED DISCOUNT

In more stable times, buyers often receive modest discounts to book value, but these discounts have increased significantly recently.

“Typically, you’ll have a portfolio that trades close to book value…can be discounted from 1 to 2%. Today we see these top quality portfolios. are traded at a double-digit discount,” said Jan Philipp Schmitz, head of the Germany and Germany division. Asia at Ardian, one of the largest players in the private equity secondary market.

“As a buyer, you can be very, very picky,” he says.

On paper, a lot of private investments, often valued quarterly, appear to have performed very well this year. But there are signs that sentiment is changing.

American acquisition company Carlyle Corporation (NASDAQ:) is struggling to meet its fundraising goals, the Financial Times reported.

In addition, the widely held unlisted Blackstone (NYSE:) real estate trust, which has increased in value this year, is facing withdrawal pressure. It has restricted withdrawals after the redemption reaches the limit.

However, there are still many people who are satisfied with holding private investments.

The Thai government pension fund, for example, has allowed the proportion of its portfolio in private assets to grow from about 5 percent eight years ago to about 18 percent to 20 percent, said Man Juttijudata, deputy secretary-general of the strategy. investment strategy and external funds of the fund. management team, told Reuters.

“It offers good returns over the long term, with an acceptable level of risk and less volatility than major assets,” he said.

However, analysis from US investment bank Jefferies shows that 58% of secondary market transactions by value in the first half of 2022 were due to other funds acting as investors in mutual funds. privately performed. Participants see increased selling pressure.

“There are still a lot of companies that I feel are overvalued and I think that is,” said Vikas Pershad, portfolio manager for Asian equities at UK fund manager M&G Investments in Singapore. will change in the first half of 2023.”

“I think people just need to be more realistic.”



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