Denominator effect impact to be less than post-GFC – Adams Street

Institutions hurt by 'chronic corporate earnings disruption', such as university endowments, could come under pressure to sell on the secondaries market.

The denominator effect will be a less significant trigger of distressed dealflow than it was after the Global Financial Crisis, according to a report by Adams Street Partners.

In The Secondary Market Under COVID-19: Learning From the Great Financial Crisis, the investment manager’s head of secondary investments, Jeff Akers, and partner Pinal Nicum said the impact of “chronic corporate earnings disruption” on the health of institutions will be a greater driver than portfolio-level phenomena.

The high fixed-cost base of universities, extended periods with fewer students on campus, higher scholarship requirements and fewer alumni able to make grants could combine to create “acute liquidity needs at university endowments”, the report said.

Others investors likely to come under pressure include corporate pensions in Europe, which tend to be “tightly tied” to the performance of their underlying operating companies, and high-net-worth individuals who own businesses in badly affected sectors and need to free up liquidity to support them.

“[Tolstoy said] ‘each unhappy family is unhappy in its own way’ – we could say the same about unhappy periods in the financial markets,” the report said.

The denominator effect was ranked third in the list of likely drivers of dealflow based on conversations with limited partners.

The stress being felt by private equity portfolio companies will lead to an increase in GP-led processes, the report noted. Many GPs face short-term liquidity needs or longer hold periods and don’t have fresh capital available to support their businesses.

“Once valuations reset over the next three to four quarters, we expect that there will be a significant uptick in GP-led secondary activity,” Nicum told Secondaries Investor. “This opportunity is likely to last for several years.”

Last June, Adams Street held the final close on its sixth dedicated secondaries programme on $1.05 billion, in addition to raising around $1 billion via separately managed accounts.