A push by the richest US universities to unload their stakes in private equity funds is flooding the market, driving down prices for the world’s bestknown buyout firms.
Investors led by Harvard University, which manages the largest US endowment at $36.9 billion (R373 billion), may increase secondary sales of private equity funds to more than $100 billion during the next year, overwhelming available pools of capital.
Interests in funds managed by Kohlberg Kravis Roberts (KKR), Madison Dearborn and Terra Firma Capital Partners all are being offered at discounts of at least 50 percent, according to people familiar with the sales.
Crippled financial firms such as American International Group and bankrupt Lehman Brothers are joining strapped endowments such as the ones at Columbia University in New York and Duke University in Durham, North Carolina, in trying to sell private equity stakes.
A deepening global recession that is crimping the value of buyout firms’ holdings is forcing further price cuts in a market where buyers already are scarce.
“There’s a huge supply-demand imbalance,” said David de Weese, a general partner at Paul Capital Partners in New York. As much as 10 percent of the world’s $1.2 trillion of private equity interests might change hands next year in the secondary market, up from an average turnover of about 1 percent, De Weese said.
Officials at Harvard are in talks to sell $1.5 billion of limited-partnership holdings in leveraged buyout funds, including one run by Boston-based Bain Capital, according to a person who has been briefed on the situation.
Harvard and other endowments have suffered lower returns this year and face further write-downs on their private equity stakes when the funds report their third-quarter valuations.
The University of Virginia in Charlottesville said in a statement posted on its website that it might sell some of the $1.6 billion it had invested in buyout funds, noting that proceeds “may be far below face value”.
Frank Morgan, a partner at Coller Capital, a firm that invests in buyout and venture capital funds, said: “I don’t know of any institution that’s not looking at its portfolio and saying, ‘What can we do?’”
One financial institution had held discussions recently about selling more than $100 million in private equity stakes in a fund run by KKR at a discount of about 50 percent, said a person briefed on the talks. A sale has not yet been completed.
A $50 million investment in a fund run by Terra Firma, the London-based leveraged buyout firm, was also for sale, with bids implying a discount of about 50 percent, said a person involved in the process.
Even well-diversified investment funds were experiencing major setbacks, Harvard president Drew Faust said in a letter to faculty, students and staff last month.
“We need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint,” Faust wrote.
The Harvard fund provided about $1.6 billion to the university in fiscal 2008, more than a third of the school’s operating expenses.
John Longbrake, a spokesperson for Harvard, declined to comment, as did officials at Duke and Columbia.
People said the endowments wanted to pare private equity holdings to free up cash for new investments and reduce the number of managers they had to monitor. Current prices might be too low. Endowments might decide to wait for the market to recover.
The California Public Employees’ Retirement System (Calpers), the largest US public pension fund, has sold private equity partnerships and opted instead to invest in secondary funds. Calpers disclosed last month that it had disposed of $2 billion of private equity partnerships this year.
The availability of private equity stakes at discounted prices may be an attractive alternative to investments in funds themselves, which cannot be bought at less than their original value.
Commitments to private equity funds fell to a three-and-a-half-year low of $82.3 billion in the third quarter, according to data compiled by London-based research firm Preqin.
“Primary investors are a lot more interested in the secondary market at the moment,” said Craig Marmer, a partner at San Francisco-based Probitas Partners.
“It changes the dialogue and will siphon capital away from primary fundraising.”
Also squeezing limited partners is the denominator effect.
With the Standard & Poor’s (S&P) 500 index down 39 percent this year, institutional investors’ public equity holdings are suffering.
When the value of those holdings (the denominator) is lower, the percentage of the overall pool devoted to private equity (the numerator) rises, pushing the percentage of illiquid asset classes like private equity too high.
“Public equity and other parts of the portfolio have fallen, while private equity is just beginning to reprice,” Marmer said. “A number of institutions are facing the denominator effect.”
The amount of money available to buy investors’ interests in private equity partnerships more than doubled during the past year. Firms have raised or plan to amass about $40 billion for secondary funds, according to data compiled by Probitas.
Credit Suisse Group, Goldman Sachs Group, Pantheon Ventures and Lexington Partners are seeking about $16 billion between them for secondary funds, according to people with knowledge of the firms.
Sales will be driven next year by institutions such as Lehman, which filed for bankruptcy in September and had more than $1 billion invested in private equity funds.
Helping to drive down the price of private equity assets is a lag in reporting compared with publicly traded companies.
Since June, the last quarter for which many of the firms’ values have been calculated, the S&P 500 has dropped almost 30 percent. – BLOOMBERG
