While private markets are generally insulated from volatility in public markets, sustained turmoil on the public side eventually leaks through to private equity, including in pricing in the secondaries markets.
Secondaries professionals report they have been seeing impact from the public markets volatility that have roiled markets since the beginning of the year. Pricing had been rich for buyouts funds as of the fourth quarter, but buyers and sellers are watching closely to determine how exactly to price assets and portfolios.
And with Russia’s invasion of Ukraine this week hammering markets around the world, volatility will likely continue to be a feature of the market for the near future.
“Buyers are now saying, ‘I need more of a margin of safety, more of a discount, more cushion to enter into transactions,” said Sunaina Sinha, global head of Raymond James Private Capital Advisory. “I haven’t seen it come into deals that have already priced, but it could happen with new processes.”
Another adviser said: “People who brought things out earlier in the year were still okay, but it is certainly starting to change.”
Pricing hovered around 97 percent of net asset value last year, according to Jefferies full-year volume report. Buyers flocked to LP portfolios as they sought to diversify beyond the concentrated bets they made earlier in the year.
“Market confidence was heightened by public market performance, and GPs generally increased private company valuation marks as multiples expanded across virtually all sectors,” the report said.
That led many sellers to bring large portfolios to market, including California Public Employees’ Retirement System, which is shopping a $6 billion portfolio of private equity fund stakes, Buyouts recently reported. APG, a large Dutch pension administrator, is selling a 2 billion euro portfolio of private equity interests, Buyouts reported.
Some portfolios just hitting the market could take longer to complete, or, at worst, sellers will not get pricing they expected and pull back from sales. Advisers also are prepping sellers – including LPs who want to offload fund stakes and GPs contemplating continuation fund deals – that pricing has changed, sources told Buyouts.
“We’re telling GPs this is likely to be an effect that’s in play,” Sinha said about public market volatility. The adviser is telling GPs to market assets conservatively to avoid having to take big write-downs when markets shift.
Pricing shifts are especially expected around tech and growth assets, multiple sources told Buyouts. Lower pricing would reflect the carnage in the public markets, where some of the leading tech stocks are down steeply from their 52-week highs. PayPal, for example, plunged 25 percent to under $133 earlier this month after a disappointing fourth-quarter earnings report.
“People have to reset expectations for valuations in the tech space,” the second adviser said. “Multiples are coming down, you’ve got the geopolitical risk, interest rates are on the rise, we’ve shifted from one crisis, the pandemic, to new ones. So yeah, it’s going to start impacting things in the very near term.”
What will be interesting to see is if buyers, who have been on binges over the past few years spending and raising capital at furious pace, will slow down their activity as markets sort out.
“I would not be entirely surprised to see some of the buyers pull back some,” the second adviser said.
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