More US institutional investors have to sell private equity shares at a discount to get out.
Illustration photo. The New York teacher pension fund sold $3.5 billion worth of private equity stakes in December to reduce its allocation to 9 percent, according to the FT. Photo: SPENCER PLATT / AFP / NTBPublished:
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US pension funds and university funds (endowment fundsendowment funds Funds that universities and other institutions have, where they use the returns from the fund to finance their operations) sold 99 percent of their private equity shares last year at or below net asset value The value of a fund’s assets minus liabilities, often used to calculate the value per share in a fund (Net asset value) in the so-called secondary market, writes Financial Times Thursday.
It is the biggest discount at a discount since investment bank Jefferies began recording the transactions in 2017.
Private equity funds invest in unlisted companies with the aim of making a profit when the companies are either listed on the stock exchange or sold on.
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A weaker listing and transaction market transaction market The market where the buying and selling of companies and their assets takes place means that more people turn to the secondary market the secondary market A market where investors can buy and sell investments that are not new, such as stocks or mutual funds that are already in circulation to recover out of the investments, according to the FT. This particularly applies to pension funds with payment obligations payment obligations Obligations a fund or an institution has to pay out money, for example pension payments.
Private equity investments are not very liquid, which means that they are difficult to sell at short notice. When investors nevertheless have to sell, it is usually at a discount compared to the book value.
Higher interest rates have weakened the value of private equity portfolios as investors flock to fixed-income securities.
However, the discounts in the secondary market have decreased recently after the US central bank signaled a softer interest rate path going forward, according to Jefferies.
Big increase
Both pension funds and funds at American universities have in recent years increased their allocation allocations The distribution of investments within a portfolio, for example how much is invested in shares, bonds or private equity to private equity sharply, writes the FT.
According to the data company Preqin, private equity accounted for an average of 11 per cent of the pension funds’ capital in 2023, up from 8 per cent three years ago.
According to Jefferies, private equity shares were traded for 112 billion dollars in the secondary market last year, the second most ever.
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