Big Investors Rush to Exit Private Equity After Market Turmoil

Pensions and endowments look to sell private equity stakes as cash pressures grow and markets fall

Major investors like pension funds and university endowments are looking to offload their stakes in private equity after a dramatic fall in global markets. This could signal serious trouble for the $4 trillion private equity industry, which includes giants such as Blackstone, KKR, and Carlyle.

Why Are Investors Pulling Out Now?

Recent stock market declines have left many institutional investors overexposed to illiquid private equity assets. These are investments that can’t be quickly or easily sold for cash.

• Many investors had hoped for a return of strong deal-making and IPOs under Donald Trump’s presidency to help boost returns.
• Instead, deals have slowed dramatically, leaving investors struggling to meet capital commitments.

“This is the most demand for liquidity I’ve seen since the early days of Covid,” said Matthew Swain from Houlihan Lokey.

The ‘Denominator Effect’ Explained

One key reason investors are under pressure is the “denominator effect”. Here’s how it works:

• When public market values fall, the percentage of an investor’s portfolio made up of private assets (which are only revalued quarterly) appears much larger.
• This can push them above their target allocations, forcing them to rebalance by selling off private equity stakes.

“If the markets keep falling, the denominator effect will become a bigger issue,” said Oren Gertner from Sidley Austin.

Selling at a Discount May Be Unavoidable

Because demand for private equity exits is rising, investors may have to sell their holdings at a loss on the secondary market.

• Prices for fund stakes, once near 100 cents on the dollar, could now fall to below 80 cents.
• Despite resistance to selling at such discounts, cash-strapped institutions may have no choice.

“Most people don’t want to sell below 80%, but this time could be different,” warned a senior banker.

Endowments Among the First to Exit

University endowments are expected to lead the sell-off:

• They are already facing threats from Trump to tax their portfolios and cut federal grants.
• With less cash available, they’re likely to be the first to offload private equity stakes.

Outlook: A Tough Time for Private Equity

The private equity industry had already started to shrink last year, with fundraising dropping 23% from 2023, according to Bain & Co. Hopes of a market rebound are now fading, leaving firms in one of their most vulnerable positions in decades.

As deal-making dries up and asset values fall, investors are losing confidence and turning to the secondary market to salvage what they can — even if it means accepting steep discounts.

In Summary

With markets shaky and private equity returns under pressure, large investors are looking to raise cash fast. The result could be a wave of discounted sales that could shake the private equity world and hurt its biggest players.

Sources: (FT.com, ChatGPT)