Here we go... we're going to see many of these deals over the next six months. I believe this is the first indication from the industry that the bottom is upon us. There are many private equity firms in serious trouble out there and I overheard several friends mention that these portfolios could be going at upto 75% discounts! This is a spectacular blow to LP's but represents unbelievable deals for those who are still liquid.
Goldman to buy discounted private equity holdings
By Deborah Brewster in New York
Published: April 12 2009 23:30 | Last updated: April 12 2009 23:30
Goldman Sachshas raised $5.5bn for a fund to buy discounted private equity holdings – the largest amount ever raised for a fund of this type – as investors anticipate a flood of forced sellers trying to offload private equity stakes.
Goldman’s Vintage V fund last week closed to new investors after 10 months of fundraising, having surpassed its goal of $5bn. The fund is a so-called secondary fund, which buys investors’ holdings in private equity and buy-out funds.
The successful fundraising reinforces the view that the private equity secondary market is where most deals are expected to happen in the next year, as investors try to raise cash. JPMorgan Chase is also raising a secondary fund and is believed to have attracted $500m over the past few months.
Banks, which account for about 25 per cent of private equity investors, are expected to be big sellers of their holdings as they seek to raise capital.
David de Weese, a principal at Paul Capital, a secondary market firm, said: “There is $130bn of private equity on the balance sheets of the six big US banks and AIG. AIG alone has $30bn. When you have a federal regulator sitting in your office, you develop a new view of what you are willing to sell.”
Investors who buy into private equity funds cannot redeem their investments. A sale to another investor or secondary fund is the main way out. Until recently, they often sold at a premium. However, the holdings have in recent months been changing hands at record discounts of more than 50 per cent of the original value.
Mr de Weese said that hedge funds with private equity holdings had emerged as new sellers, especially if they were facing big redemptions. Pension funds and endowments are also sellers, as the fall in the value of their equities has left them overweight in private equity.
Last year, the Calpers pension fund sold more than $2bn in private equity. Harvard’s endowment fund tried to sell $1.5bn in holdings this year, but was unable to get a high enough price.
Orin Kramer, chairman of the New Jersey pension fund, said: “The secondary market will become very interesting, We’re carefully watching it. But it’s a pretty treacherous due diligence. There is too wide a gap between what sellers pray for and what buyers will pay . . . in aggregate, a lot of private equity valuations are overstated. They don’t reflect reality.”
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