Fiddich Review Centre
Alternative Investment

Investors eye secondary sales for balance

Even name-brand alternative investment managers acknowledge that after a record-setting fundraising year in 2021, it will take them longer to raise new funds.

“On the fundraising front, it is getting harder out there,” particularly for North American private equity, said Jonathan Gray, New York-based president and chief operating officer of Blackstone Inc., during the firm’s July 21 second-quarter earnings call.

However, he reaffirmed that Blackstone executives still expect to raise a total of $150 billion across 18 funds over its current 18-month fundraising cycle ending around mid-year 2023.

Mr. Gray said on the call that Blackstone is on track to raise $20 billion for its private equity secondary market flagship fund, Blackstone Strategic Partners Fund IX, which would be the largest secondary market vehicle ever raised, to take advantage of the investment opportunity.

“One of the positives here (in the secondary market) is the overallocation to private equity that makes fundraising more challenging for many firms,” Mr. Gray said.

But alternative investment managers may have to wait a while before the wave of LP sales rolls in, industry insiders say.

Nigel Dawn, global head of private capital advisory at Evercore Group LLC, in an email said that he expects secondary market transactions to slow in the second half because of “the recent deterioration in global macro-economic conditions and a more challenging fundraising environment,” he said.

Mr. Gray said he doesn’t expect secondary market deals to start rolling in right away.”What’s going to happen now is, investors (LPs) will probably pause … in terms of selling and there’ll probably be a period where some markdowns will come through, then we’ll see sales pick up again,” he said.

“I don’t think large investors are rushing for the exit,” but the secondary market is more mature than it was after the global financial crisis, said Andy Nick, Scottsdale, Ariz.-based managing director in private capital advisory at Jefferies.

The largest asset owners have embraced secondaries as a tool to actively manage their portfolios, he said. And in the last three months, many asset owners have inquired about limited partnership sales due to the denominator effect, which is when a drop in public markets portfolios boosts their alternative investment portfolios above their allocation targets, Mr. Nick said.

These investors are not looking to sell limited partnership interests right away, he said. Many are waiting until their managers release the June 30 valuations of their portfolios, expected in mid-August, Mr. Nick said.

“There’s a view that there will be write-downs in June 30,” Mr. Nick said. Investors are waiting to see how overweight they are after managers post their portfolio losses, which could cause them to adjust how much or whether they need to sell on the secondaries market, he said.

Already, some managers are reporting negative returns. For example, Blackstone said it had gross losses of 6.7% in corporate private equity for the second quarter. Gross returns were also negative for private credit at -0.1% and tactical opportunities, which had a loss of 2.4% in the second quarter.

Meanwhile, potential buyers are “open for business,” but are being more cautious, Mr. Nick said.

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