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Secondary market activity surges as US investors discount PE stakes

US institutional investors are offloading their private equity holdings at slashed prices, reflecting a broader trend of reducing exposure to the illiquid asset class, with pension funds and endowments leading the charge, according to a report by the Financial Times. 

Last year, 99% of these holdings were sold either at or below their net asset value on the secondary market, marking the highest percentage since investment bank Jefferies began tracking this data in 2017. The trend continued with 95% in 2022 and 73% in 2021.

The surge in secondary market activity can be attributed to subdued stock listings and a slowdown in mergers and acquisitions, which are typically the primary exit routes for private equity investors. As a result, investors have increasingly turned to the secondary market to liquidate their positions.

Additionally, pension plans, facing obligations to disburse funds to beneficiaries, have found the secondary market to be a quicker source of cash. These developments highlight the growing importance of liquidity management in the private equity landscape.

The report quotes Richard Ennis, Co-Founder of EnnisKnupp, a consultancy that works with pension plans: “Public pension funds have for many years poured money into private equity on the premise that it was high return and low risk while illiquidity was deemed not to be an issue.

“They are now discovering that PE is no magic bullet and liquidity does matter for investors with a sizeable payout requirement.”

Public pension funds in North America allocated an average of 11 per cent of their assets to private equity last year, up from 8 per cent three years ago, according to Preqin, a financial data provider.

Investors have increasingly turned to secondary sales as they aim to manage their exposure. According to Jefferies, the global private equity secondary market witnessed a substantial $112bn in transactions last year, with the $137bn New York State Teachers’ Retirement System, which sold 34 private equity holdings with $3.5bn in total commitments on the secondary market in Q4 2023, being a prominent example.

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