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Steven Grey

Chief Investment Officer - Grey Value Management

Financial Fire Sale: The Murky Secondary Market for Private Equity Stakes This is kind of wild... Last year, Hamilton Lane Private Assets Fund recorded 𝘢 39% 𝘨𝘢𝘪𝘯 𝘰𝘯 𝘢 𝘨𝘳𝘰𝘶𝘱 𝘰𝘧 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵𝘴 𝘪𝘵 𝘣𝘰𝘶𝘨𝘩𝘵 𝘵𝘩𝘦 𝘥𝘢𝘺 𝘣𝘦𝘧𝘰𝘳𝘦 for $52 MM. Of the three dozen investments it bought on Sept. 29, nearly half had more than doubled in value on Sept. 30. The Hamilton Lane fund’s stake in a fund that focuses on Latin America 𝘳𝘰𝘴𝘦 𝘦𝘪𝘨𝘩𝘵𝘧𝘰𝘭𝘥 𝘪𝘯 24 𝘩𝘰𝘶𝘳𝘴. How/why was Hamilton Lane able to achieve such stratospheric immediate gains? In short, by adopting the valuation provided by the seller rather than valuing the investment based on the price 𝘵𝘩𝘦𝘺 𝘫𝘶𝘴𝘵 𝘱𝘢𝘪𝘥. Generally speaking, investors holding stakes in private-equity and other funds are allowed to estimate their fair value by relying on what the funds’ managers say they are worth (their net asset value). What explains the huge disparity between the apparent value and the price paid? Fundamentally, the only reason why someone would sell an investment at a massive discount to the actual value is they are being forced to. In other words, the huge overnight gains some secondary investors are registering derive from fire sale conditions. Investors had better hope this is the case, because the secondary market for investments in private equity funds is not only obscure and illiquid - it's gigantic. The fund industry managed about $13 trillion of private-markets assets this past year, and secondary market volume for private-equity and similar funds in 2023 was $112 BN. Some entities have massive exposure to this asset class/pricing dynamic. The California Public Employees’ Retirement System in 2023 classified about $168 BN of its $494 billion of investments using the NAV category, including $60 BN of private-equity holdings. Harvard used the NAV classification for about $51 BN of its $59 BN of investments (~86%!), including $22 BN of private-equity holdings. To that point, one last thought: For every apparently savvy secondary vulture there must be an equally desperate seller. To what extent are investors in the 𝘴𝘦𝘭𝘭𝘦𝘳𝘴' funds aware that they are about to take a financial broadside - or effectively already have? Read Jonathan Weil's great piece in the The Wall Street Journal: https://lnkd.in/exZupCMM #investing #privateequity #secondaries #stocks #bonds #calpers #harvard

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