However, fund managers have been slow to sell fund assets into the current uncertain markets, indicating a reluctance to crystallize asset values that may be lower than expected. Instead, many are using leverage to release funds.
“Historically, if you invested into a PE fund your capital was locked in for 10/11 years,” said Jeff Johnston, head of fund finance at Everbank. “Now there are more and more ways through leverage, and secondary sales to try and get that capital back.”
The strategy of using so-called net-asset-value, or NAV, financing — a loan backed by a pool of portfolio companies — has become more widely used. The loans are typically costly and critics warn they are likely to dilute returns later down the line.
Vista Equity Partners generated $18 billion in total value by cashing in on bets since late 2021, but it still signed a $1.5 billion NAV loan in March last year that earmarked $500 million for investor distributions, according to a person with knowledge of the matter.
A representative for Vista declined to comment.
David Philipp, a partner at Crestline Investors, whose Fort Worth, Texas-based firm provides NAV loans to money managers, said there’s been an uptick in LPs requesting capital back and asking for general partners to explore NAV lending to facilitate a portfolio level recap.
“This is often stemming from a sponsor soliciting the LPs to re-up in an upcoming fund prior to delivering money back from previous vintages,” Philipp said.
Some PE firms are also taking out loans at the management company level to help meet fund commitments.
So-called manco loans are typically backed by assets including the promise of future fee income and can charge interest into the high teens.
Private equity’s increased use of leverage can sometimes come at a cost for other LPs in the fund who haven’t opted for the fund to add leverage, according to Crestline’s Philipp.
“We’ve seen a few cases where the majority of LPs have voted in favour of NAV and the rest haven’t, and they’re then forced to take expensive liquidity,” he said. “That obviously can create some issues unless the minority group of LPs are given an ability to opt out or given an attractive reinvestment option to neutralize the cost.”
As sovereign wealth and pension funds raise their scrutiny and demands over private markets firms including those in the $1.6 trillion private credit market, some are increasingly lending directly to borrowers, and cutting out direct lending giants altogether.
The Canada Pension Plan Investment Board (CPPIB) and GIC — which typically provide funds to private credit giants to deploy — directly offered among the largest portions of a €4.5 billion loan backing Blackstone Inc. and Permira Holdings’ purchase of European online classified company Adevinta in November, Bloomberg previously reported.
“LPs are generally becoming more and more educated in private markets investing,” said Reach Capital’s Barrett. “The next question will be when will some of the biggest backers of this sector begin building their own in-house origination teams and start cutting out the middle man.”
This article was provided by Bloomberg News.