Every form of investment in the world looks horrible right now, but private equity, by comparison, looks like it’s the least among the losers. It’s not a good place to be, but things could be worse.
As a veteran LP advisor reminded me today, during the last down-cycle, driven by the tech and telecom implosion, the LPs that wanted to get out of private equity did so “because it sucked”. In other words, the oversized funds to which these LPs had committed capital were revealed to be backing fairy-tale businesses plans. The whole concept was flawed from the get-go.
This time around, many LPs are constrained with regard to private equity because all the other asset classes are deeply unattractive. Stocks are down, meaning private equity allocations are swollen past the point of fiduciary flexibility. Fixed income is a frozen block of granite. Especially for endowments and foundations, hedge funds that held themselves forth as bond substitutes have cratered and are not offering redemptions.
GPs are caught in a distribution drought, which has made the plight of cash-strapped LPs worse. But this lack of cash-back is hardly the result of GP mismanagement. IPOs have ground to a halt and no one with a good company can responsibly sell it in the M&A market under current circumstances.
Far from murmuring their discontent with private equity, LPs are scrambling to raise cash so they can double down in the current environment. All are aware of the performances of recession vintages. They are heaving great swaths of partnership interests into the secondaries market. They are begging GPs to aggressively write down their portfolios, which would have the effect of freeing up more private equity allocation. One well known placement agent is trying to convince LPs to write down the value of their own undrawn commitments in order to expand allocations (intriguing idea, but so far no takers).
All of this activity signals a high degree of confidence in private equity on the parts of limited partners. It also signals a great degree of maturity from the base that supplies capital to the industry. It used to be that write-downs caused hand-wringing among LPs and their board members. Now, the fear of not being able to participate in a great vintage is keeping LPs up at night.