Recycle, reuse, renew

Limited partners' widening search for liquidity amid market chaos led the month's news coverage on PEO.

We wrote in late October that concern over cash-in-hand was expected to drive increased secondary activity as some LPs seek to avoid defaulting on capital calls.

As if on cue, in the following weeks it emerged that some of the world's best regarded investors in private equity were planning to sell off interests or already had – the Harvard Endowment and the California Public Employees' Retirement System, to name just two.

As PEO delved deeper into secondary market stories and sources over the month, we learned “lots of good stuff”, as one limited partner put it, was reluctantly being sold to fund capital calls as well as new commitments to funds expected to outperform, given the historic returns of funds raised during market distress. And, perhaps not surprisingly, we also learned the booming secondaries market was not exactly sunshine and roses.

Behind the attention-grabbing headlines – “Wellcome Trust to sell £3.8bn in fund interests”, for example – we discovered some palpable tension amid the market's participants. Worries about pricing drops as large portfolios are pushed into the market are being compounded by concerns that material adverse change (MAC) clauses will cause deals to fall through. So far, at least one already has – HarbourVest Partners recently backed out of a signed secondaries deal in October by invoking the dreaded MAC.

Furthermore, we reported that secondary market manoeuvres aren't the only solutions LPs are employing to keep their private equity programmes alive – they're also asking GPs to help. Exclusive commentaries this month noted some LPs are imploring GPs not to call down capital, while others are asking GPs to aggressively write down their portfolios, which would have a “numerator effect” of freeing up more capital for private equity allocation.

While it's easy to get caught up in the notion that all of this indicates industry-wide panic, the actions discussed above – while admittedly stressful for many LPs – are an incredibly strong endorsement for private equity from some of its oldest investors. Limited partners are exercising a slew of options to enable them to participate in the asset class and the strong returns being projected for this year's vintages.