Endowments Dump Private Equity Stakes

University endowments such as Harvard’s are almost uniquely well-suited to invest in private-equity funds: since they’re permanent pools of capital, they can ride out market fluctuations and illiquidity, and hold their stakes for decades if necessary until they mature.

Or, not so much:

A push by the richest U.S. universities to unload their stakes in private-equity funds is flooding the market, driving down prices for the world’s best- known buyout firms.

Investors led by Harvard University, which manages the largest U.S. endowment at $36.9 billion, may increase so-called secondary sales of private-equity funds to more than $100 billion during the next year, overwhelming available pools of capital. Interests in funds managed by KKR & Co., Madison Dearborn LLC and Terra Firma Capital Partners Ltd. all are being offered at discounts of at least 50 percent, according to people familiar with the sales…

Officials at Harvard are in talks to sell $1.5 billion of limited-partnership holdings in leveraged buyout funds, including one run by Boston-based Bain Capital LLC, according to a person briefed on the situation.

I reckon this is half panic, and half "let’s get out while there’s still some value in these things". If the funds are really being sold at 50% discounts, then one stated reason makes no sense at all:

Also squeezing limited partners is the so-called denominator effect. With the Standard & Poor’s 500 Index down 39 percent this year, institutional investors’ public equity holdings are suffering. When the value of those holdings (the denominator) is lower, the percentage of the overall pool devoted to private equity (the numerator) rises, pushing the percentage of illiquid asset classes like private equity too high.

Er, no: if the endowment’s public equity holdings are down 39% and their private-equity holdings are down 50%, the percentage of the endowment invested in private equity will have gone down, not up.

The problem with private equity funds is not that they’re illiquid, or that they’re long-term: endowments can cope with both of those quite easily. Rather, it’s that they’re highly levered, which means that they can go to zero quite easily. And once they’ve hit zero, they don’t ever recover.

Still, there does seem to be a lot of money still willing to invest in the things:

The amount of money available to buy investors’ interests in private-equity partnerships more than doubled during the past year. Firms have raised or plan to amass about $40 billion for secondary funds, according to data compiled by Probitas.

Credit Suisse Group AG, Goldman Sachs Group Inc., Pantheon Ventures Ltd. and Lexington Partners are seeking about $16 billion between them for secondary funds, according to people with knowledge of the firms.

Ah, secondary funds. Not only do you pay the private-equity shop its 2-and-20, you also get to pay some secondary-fund manager his (undoubtedly substantial) fees on top! Maybe Harvard should send out a mailing to its alumni, offering a half-price sale on private-equity investments, no fee. After all, I’m sure a large chunk of that $40 billion comes from people with some connection to Harvard College.

(HT: Carney)

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