Another Important Story Today

by Chris Sturr | November 24, 2008

From today’s Financial Times. This suggests that the selloffs from pension and other funds, that have followed the massive hedge fund ones, are far from over. And things all the more bleak for PE, or PE financed firms, as well.

Investors rush to quit buy-out funds

By Henny Sender in New York
Published: November 23 2008 19:47 | Last updated: November 23 2008 19:47

Investors in buy-out funds are so concerned private equity returns will slump in the years ahead that they are selling their commitments for as little as 30 per cent of their original value.

Eighteen months ago, if such stakes were available at all, they generally traded at a premium.

The collapse in valuations reflects growing concerns that many private equity-owned companies will implode as the economic contraction intensifies. Some of the largest deals, struck at the height of the private equity boom that ended in the spring of 2007, now look to be disastrous for the equity holders.

Cerberus’s investment in crisis-hit Chrysler is among the most high-profile of the boomtime deals. Some investors said Cerberus fundholders were likely to have to accept the sharpest discounts on stake sales in the secondary market.

TPG fundholders have been able to sell for slightly higher prices. One investor said he had just bought a piece of a TPG fund in the secondary market for 45 cents on the dollar, reflecting concerns about TPG’s stake in gaming company Harrah’s Entertainment and other companies hit by the economic slowdown. Blackstone, which bought a small stake in Harrah’s from Apollo Management, has marked down that stake to zero, according to Blackstone investors.

The sceptics’ view of some TPG investments clashes with more upbeat assessments of the firm, based on the imminent returns from its sale of telecoms company Alltel to Verizon, and TPG’s biggest deal yet—the purchase, with KKR, of utility TXU, widely seen as a safe, smart purchase.

Nonetheless, the sell-out from private equity funds is gathering speed as pension funds, endowments and family offices realise these funds are likely to fall far short of original target returns. They are already reeling from losses in the stock market and on hedge fund investments.

Monte Brem, chief executive of StepStone, which acts on behalf of such investors, says he thinks it may make more sense to buy funds at a sharp discount in the secondary market rather than paying full price for stakes in new funds. Mr Brem is now considering buying stakes in the secondary market for his clients.

The growth of activity in the discounted secondary market for private equity fund stakes is compounding problems for firms seeking to raise new funds. Even those firms whose portfolios have held up the best, such as Blackstone, are finding the going very slow.

Copyright The Financial Times Limited 2008

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