$100b mismatch in private equity secondaries demand and supply

Recessions are traditionally considered a good time to invest in private equity, but liquidity constraints and the growth of unlisted assets within portfolios is causing pension funds to sit on the sideline. Sally Collier, London-based partner at global private equity fund of funds Pantheon Ventures, said there was a US$100 billion “mismatch” between the funds available for investment in the secondaries market and the “tidal wave of supply”.

The fall in prices and more moderation in leverage structures should present good opportunities for investment going forward, Collier said.

While the $174 billion CalPERS and the $36.9 billion Harvard University endowment have been among the sellers of private equity during the financial crisis, Collier said most institutional investors were maintaining their allocations.

The level of capital calls was not very high because investments were not being made at a high rate, she added.

“The beauty of private equity is it’s a cash return,” Collier said. “We don’t see so many pension funds selling.”

She described the secondaries market as a “buyers’ market” but warned pension funds to be tread carefully due to the wide dispersion of returns available.

“The return variability [of private equity] is nine times the public markets. In times of difficulty that dispersion probably widens,” she said.

“That’s exactly what we are seeing at the moment – therefore the premium for getting it right is even stronger.”

Anna Hocking, senior manager, investor services Australia at Russell Investments, said many Australian super funds had recognised the opportunities for investment in the private equity market but were “not necessarily able to take advantage of them because of liquidity and the denominator effect”.

The denominator effect describes the rise in unlisted assets within pension portfolios as the value of listed assets falls.

CalPERS sold off around $2.1 billion in fund interests in a number of secondary transactions starting in the third quarter of 2007 and finishing in August 2008.

Harvard, which manages the largest US endowment, put around $1.5 billion of stakes in private equity funds on the market in 2007.