More liquid, more competitive

Leveraging a portfolio for liquidity can be similar to refinancing a property, but what effect does this have on the secondaries market?

Leveraging existing portfolios is another liquidity ‘tool’ for private equity investors, but sources say the increased use of such financing is making the secondaries market more competitive.

Private equity will perhaps never be as ‘liquid’ as other asset classes, but it has certainly come a long way. Ten years ago the secondaries market still had a negative stigma and it could have taken up to a year to sell a $1 billion portfolio of fund stakes; these days such a large disposal can close within as little as a month and nobody bats an eye, according to industry sources.

The secondaries market has opened up greater liquidity options not just because of the speed and efficiency with which it can now process large deals, but because of the increasing array of vehicles and transaction types available to investors. One of them is the use of debt.

Gregg Kantor, who structures private equity debt financing deals at Investec, compares leveraging a portfolio to the liquidity available in the housing market where investors can mortgage or refinance a property with relative ease. With recent stock market volatility, investors are looking to rebalance their portfolios, Kantor told me.

“We’ve had quite a lot of discussions with people about how they can rebalance their portfolios because of their over-allocation to private assets versus public, and debt is one of the options for them,” Kantor said. “They’ve been looking at some of the ways of pulling some liquidity out of the private market and reinvesting it into the public market.”

Previously, if a limited partner saw an opportunity they wanted to exploit or if they wanted to simply rebalance their portfolio due to regulatory or macroeconomic factors, the only way they could get liquidity was by selling their private equity holdings, Kantor said.

“Leverage has really opened up the ‘art of the possible’ for people in terms of what options they have available to them if they want liquidity from their portfolio,” he said.

While leverage may help LPs extract liquidity from their portfolios, it’s also helping general partners remain competitive in deals. In January, Ardian purchased a $940 million portfolio of fund stakes from Universities Superannuation Scheme and reportedly leveraged the portfolio to fund the purchase.

So if investors and fund managers alike have greater access to liquidity through leveraging their portfolios, what impact will this have on the secondaries market?

Competition will intensify, leading to fewer deals to pick from and higher pricing as sellers stand firm, market sources tell me. That’s not a pleasing scenario in light of record high levels of dry powder – around $65 billion has been committed to secondaries strategies, according to Evercore.

But it’s one that’s pleasing in the sense that the secondaries market is helping to solve what has been the historic drawback to investing in alternatives: their illiquidity.

“Private equity is becoming a more liquid asset class,” one London-based market source agreed, referencing the secondaries and associated credit markets. “The question is where all that extra liquidity will go.”

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