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Large private equity investors are using floods of capital from wealthy individuals to cash out shopping fund holdings at higher prices despite the long-standing recession in the industry.
Some of the biggest evergreen cars that retail investors can regularly deposit cash and withdraw, have purchased private equity fund shares from institutional investors seeking liquidity after a lack of distribution.
That additional demand has helped support the price of stocks in secondary market private equity funds, despite some institutional investors cooling off investments in new funds as the acquirers withdraw their investments and return cash to their backers.
“There’s a lot of money flowing through these (evergreen) vehicles,” said a top adviser.
The interests of existing funds (so-called secondary) are attractive to evergreen fund managers as they are more flexible in buying and selling than direct investments in companies, allowing investors to advance cash and withdraw regularly.
Hamilton Lane has invested in about half of the two Evergreen private equity vehicles secondarily, besides two evergreen private equity vehicles. Stepstone’s $4.3 billion vehicle for US investors focuses primarily on private equity, deploying 80% of capital second, along with some actual assets and liabilities.
“A lot of money is raised every month and the funds want to invest it right away,” the advisor said.
Retail funds offer prices with higher secondary stakes than others in the market. It helped the buy-out sector survive a challenging period by making it easier for institutional investors to acquire cash in their shares when traders don’t want to sell or sell the underlying assets.
Research data from advisory firm Campbell Lutyens shows that Evergreen vehicles were paid an average of 4% more fund stakes than traditional buyers last year than traditional buyers, but investment bank Evercore said retail capital inflows “has increased pricing.”
“Funding on evergreen vehicles is unpredictable,” said Immanuel Rubin, second co-head of Campbell Lutyens. “Unless you deploy (cash) quickly, you can create a drag on a return.”
Also, by purchasing Secondary, Evergreen Fund Managers can show immediate returns. They tend to be priced at a discounted price on Net Asset Value (NAV), but buyers can mark their previous NAV immediately after purchase.
Signs that Evergreen vehicles were paying more for the Secondary could mean that the vehicle is buying a “high-quality portfolio,” said Euan Finlay, head of Europe, who is a private equity investor, Partner Capital, Middle East and Africa. But he instead said it could mean that they are tolerating slightly lower returns.
“The incentive structure of having to spend quickly to feed the beast and get attractive returns early could lead to price their bids using lower long-term targets,” Finlay said.
However, he added that evergreen vehicles could potentially return similar amounts of cash as a drawdown fund, as they could fully invest in cash for longer.
Bob Long, chief executive of Stepstone’s Private Wealth, said the company’s Evergreen Funds usually invest in Secondary along with its institutional investors. He added that only a small portion of the revenue from Stepstone’s wider Secondaries business came from the initial purchase discount.
Some evergreen cars deploy cash as continuing funds. This is a dedicated vehicle for purchasing businesses that are increasingly established by private corporations.
Continued vehicles can be used to ensure that the acquisition company holds the best company. However, they can also be deployed to generate cash for the fund’s original supporters from assets that the deal maker cannot sell at the valuation they wish to see.
As the backlog of unsold assets grows, an increase in challenged holdings becomes a continuation of funds.
According to Finlay, Partner Capital’s “huge net asset values” of companies that have struggled to leave recently.
“Where are you going?” he said. “I think a lot will continue.
