Private equity’s valuation delay relative to public markets can be a blessing and a curse. While the asset class may be less susceptible to volatility, buyers and sellers can sometimes be left playing a waiting game when there’s a sharp mismatch in private asset prices and their public references.
Portfolios have been slow to reflect this year’s rout in public markets driven by war in Ukraine, rising inflation, interest rate hikes and supply chain issues.
Partners Group chief executive David Layton said in an H1 update last week that its private equity net performance is expected to come down by mid-single digits as of June. His warning echoes that of EQT, which said it had marked down the value of several of its flagship funds to reflect lower public market pricing references. The $14 billion San Bernardino County Employees’ Retirement Association, meanwhile, said its VC and growth equity funds dropped in value by 10 percent this year, affiliate title Buyouts reported last Friday.
The full extent of private equity’s repricing may not become clear for some time. As the California Public Employees’ Retirement System notes on its website, GPs have 120 days to provide LPs with financial data, so there is generally a two-quarter delay in performance reporting.
Portfolio markdowns could play out in several ways. First, lofty valuations relative to public equities have left many US public pensions overallocated to unlisted assets. Though some have taken drastic measures to correct this imbalance, such as cutting deployment or exploring stake sales, others – like the Oregon Public Employee Retirement Fund – instead believe the problem will right itself.
The $97 billion institution’s private equity exposure ballooned to 27 percent earlier this year, well above its 20 percent policy target. “We should expect those numbers to come down in the second quarter, given the difference in the market environment,” said Paola Nealon, principal at Oregon’s consultant Meketa, at an IC meeting. Though LPs may still find it difficult to accommodate all the re-ups hitting their desks, markdowns could remove the need for an inorganic rebalancing.
For GPs, exits may slow, as Bain & Co noted in its half-year report this week. “Due to the bulk of sponsor returns coming from multiple expansion, the rising interest rate environment could see exit activity reduce further as multiples flatten and as sponsors hold assets longer until return targets are met,” Bain wrote.
Global buyout-backed exit value hit $338 billion in the first six months of the year, down 37 percent from the same period last year. Notably, this does not include growth equity or venture capital, where a decline in tech valuations may have an even greater impact.
Holding periods may therefore become longer and GPs might increasingly look to the secondaries solutions either to generate liquidity or buy themselves more time. Such transactions could also be repackaged, as sponsors who have unsuccessfully tried to tap the secondaries market with GP-led deals reattempting to run those same processes with refreshed pricing – something Partners Group’s Layton noted on last week’s call.
A significant market shake-up could be just around the corner.