Secondary sales of private equity stakes set for record levels amid cash crunch

Secondary sales of private equity stakes set for record levels amid cash crunch


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Private equity investors are selling second-hand stakes in ageing funds at a blistering pace this year, as pensions and endowments find ways to get out of unlisted investments amid a slump in deal activity that has curtailed cash payouts.

So-called secondary deals, in which investors in private equity funds sell their stakes to new investors for cash, or a PE firm arranges the sale of a company stake to a new fund, are forecast to smash all-time records, according to investors and advisers who spoke to the Financial Times.

Matt Swain, an executive at investment bank Houlihan Lokey, predicts a record-breaking $150bn spate of sales — an increase of more than 25 per cent from 2023 and shattering a previous record of $132bn in deals in 2021. Investment bank PJT Partners predicts $145bn in such sales and calculates that activity in recent months is evenly split between institutions such as pensions dumping fund stakes and PE firms arranging deals with new funds.

The surging activity inside what was once a niche market points to the continued challenges facing the $4tn buyout industry, which has been pummeled by higher interest rates and a slowdown in dealmaking.

“The meaningful gap in distributions is driving the need for liquidity across the board,” said Darren Schluter, a managing director who handles secondary deals at PJT.

The industry is sitting on more than $3tn in unsold investments, a record level, according to consultancy Bain & Co. PE firms have been reluctant to sell companies at a loss or float businesses if the valuations do not meet expectations, choosing to instead hold those investments for longer than ever before. That has meant recent funds have returned less than half the cash to their investors compared to historical averages, leaving backers starved for returns and considering selling their holdings at discounts in secondary deals.

Matthew Wesley, global head of private capital advisory at Jefferies, estimated secondary sales had accounted for 14 per cent of overall private equity exits over the past year, up from just 4 per cent or 5 per cent in 2019 and 2020.

But the recent surge in activity also points to rising optimism on private market valuations, with buyers increasingly willing to purchase fund stakes at narrow discounts to their reported value. Schluter said demand for private equity fund stakes had risen due to strong fundraising from specialist buyers, making it an opportune time for many investors to consider sales.

“Supply is at an all-time high, but pricing is at some of the highest levels it has been across the board. There is more capital coming into the market,” he said.

In late 2022 and early 2023, a lack of secondary demand meant investors were taking steep discounts to get out of positions, with stakes selling for 80 cents on the dollar and sometimes less, according to industry sources.

Now, PJT estimates sales of buyout fund stakes are priced between 93 per cent and 98 per cent of a fund’s reported value, up three percentage points from the beginning of the year. That figure includes deferrals, in which the seller does not receive cash for as long as 18 months, which can boost prices by up to four percentage points.

Large investors in private equity funds told the FT they were using buoyant markets to quit investments in underperforming funds.

“We have made many investments over the last 25 years in private equity and, unfortunately, a material proportion of them have not liquidated in an orderly fashion,” said an executive at one large US pension fund. “And so we are taking the position that it might be time to get out of those positions through a secondary sale.”

Specialist buyers of fund stakes including Ardian, Hamilton Lane, StepStone Group and Lexington Partners have recently raised record-sized funds to purchase second-hand fund stakes. In 2023, secondary funds raised a record $93bn, according to Preqin, a 160 per cent increase on the year before.



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