Side Letter: Markdowns are coming; BlackRock’s multi-asset edge; NEST’s next PE pick

Partners Group and San Bernardino's public pension system are among the latest to mark down their private equity portfolios as valuations begin to follow the fall among their public equivalents. Plus: Why BlackRock could benefit from PE's allocation headache; and UK pension giant NEST has picked its next PE manager. Here's today's brief, for our valued subscribers only.

Just happened

Markdowns are coming
If the past 12 months have been characterised by stonking great returns from private equity portfolios, the next 12 months might well be characterised by the reverse. Partners Group is the latest to warn of potential markdowns. The firm expects its PE positions’ net performance to come down by mid-single digits as of June, chief executive David Layton said on the firm’s half-year update on Thursday. Private debt may also be down in Q2, and real estate and infrastructure valuations will likely be flat for the period.

Partners Group also expects a lull in transaction activity until August thanks to a disconnect between buyers and sellers on valuations. “On the realisation side, we do have a number of mature companies that have potential to be exited in the second half of this year, but we want to sell into a reasonably benign market environment… so we’re currently waiting to see how a couple of processes we’re watching play out,” Layton said.

The firm’s warning echoes that of EQT, which last week said it had notched down the value of several of its flagship funds to reflect lower public market pricing references. The effect is also feeding through into LP portfolios: the $14 billion San Bernardino County Employees’ Retirement Association, for example, said its VC and growth equity funds dropped in value by 10 percent this year, our colleagues at Buyouts reported Friday (registration required). “We might be at the beginning of a correction, if you want to call it that, in private markets,” senior investment officer Amit Thanki said during a Thursday meeting. “We have not seen that quite yet. But we are learning from our managers that there is a big change happening.”

Thanki attributed the decline in part to many of these strategies containing a component of public equity, noting that buyout and private debt funds continue to generate positive returns and were up 1.5 percent since the start of the year. He did, however, express concern over 2020 and 2021 vintages raised at the height of the market. “Given where we sit today, where interest rates are moving and a possible recession, we think those are going to be tough years,” Thanki said.

BlackRock’s edge
While some private equity fundraisers are losing sleep over the denominator effect in public pension portfolios, others – namely, multi-asset behemoths like BlackRock – spy an opportunity for their other products. Speaking on the firm’s Q2 earnings call last Friday, president Rob Kapito said the traditional 60-40 allocation model had been thrown out of whack by market volatility, forcing some investors to explore ways to rebalance their portfolios.

“Portfolio liquidity profiles have been impacted, and what I mean by that is many institutions have gone to their maximum in alternative or private equity allocations, hoping to fund that from the liquid portion, meaning the equity side and the bond side,” he said. “And now with that liquid portion declining… they are going to have to rebalance, and they are going to have to get closer to their target allocations. And this means that there is a lot of money that’s going to be reallocated and clients are going to need a partner with the comprehensive capabilities… to rethink the models that they are using.”

Kapito said inflation protection and cash would be a priority in a rising rate environment. “They are looking for more private equity and, in some point, liquidity in private equity, and they are looking for outsourcing partners because not only is this complex, but the operational cost and efficiencies play a very, very big role in that.”


NEST taps HarbourVest
National Employment Savings Trust, the UK’s largest defined contribution pension, has appointed HarbourVest Partners as its second PE manager, per a statement this morning. It comes amid plans to invest at least £1.5 billion ($1.8 billion; €1.8 billion) in the asset class by 2025 and, long-term, to have about 5 percent of its portfolio in PE. HarbourVest’s mandate will focus on growth and mid-market investments; the manager will invest in co-investment opportunities on NEST’s behalf through a bespoke fund-of-one. NEST, which oversees £24 billion, selected Schroders Capital as its first PE manager in May after a roughly nine-month procurement process.

HNW hedgers
The private markets’ love for private wealth is well-documented, and that affection is looking increasingly requited. Appetite for alternative assets is set to soar by 46 percent over the next year, according to a survey of mainly high-net-worth investors by AssetTribe, an alternative investment platform. In work undertaken with market research firm Survation, 580 investors across the UK and Europe were asked for their thoughts on investing in alternative assets. Some 53 percent said their appetite for alternatives would increase over the next 12 months, while less than 7 percent said it would decrease – giving a net figure of 46 percent.

The two biggest factors cited by investors were the inflation rate and the need to diversify existing portfolios (both 62 percent), with higher potential returns being the driving force for 53 percent. Asked what they were most likely to invest in, real estate was the most popular choice, with 75 percent of investors interested; infrastructure and long-term asset funds came second with 62 percent. PE, however, was way down the list of priorities, at just 46 percent.

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

18 July

19 July

20 July

21 July

22 July

Today’s letter was prepared by Alex Lynn with Carmela Mendoza.