Private Equity Fire Sales Aren’t Here Yet. But They’re Probably Coming.

As markets deteriorate, LPs prepare to sell off private investments to rebalance out-of-whack portfolios and raise cash.

Illustration by II

Illustration by II

Investors in private equity are gearing up to liquidate alternative assets in preparation for the coronavirus-triggered market rout continuing.

Limited partners are eyeing liquidation for a few reasons: portfolio liquidity, allocation rebalancing, and investment strategy shifts, according to Claire Commons, head of strategy at Palico, an online marketplace where investors can buy stakes in private equity fund secondhand.

“We’re seeing that LPs are not panicked, but they are concerned,” Commons said by phone Wednesday. “They really want to be prepared.”

Some are considering listing assets on the secondary market. Secondary buyouts have become an increasingly popular tool used by limited partners to liquidate their private equity investments earlier than they may have normally.

According to Commons, as the stock market has crashed, some limited partners’ asset allocations may have gotten “out of whack.” As public equities’ asset values drop, their relative share in an institution’s portfolio also falls.

“Should public markets go down, you’re going to be over-allocated to private equity,” Commons said. In the hopes of rebalancing their portfolio, some may sell off some of their private assets, she added.


Many may simply need cash, and pronto. Still others may want to shift their investment strategy, selling off, say, European buyout funds to ramp up another kind of exposure.

“With stocks and bonds, you can sell them pretty much on a daily basis,” Commons said. “It’s challenging to have active portfolio management within private equity.”

Prior to the public market’s drop, many private assets were trading at or above par value, which was a relatively new phenomenon.

According to Commons, secondary funds have roughly $150 billion in committed capital to deploy. If private market valuations change the way public equities have, secondaries should start trading below par.

“The public markets react a lot faster than the private markets, but I wouldn’t be surprised to see some pricing softening in private markets,” Commons said.

[II Deep Dive: Want to Avoid Portfolio Company Bankruptcies? Buy Secondhand.]

But, she added, limited partners should manage their expectations when it comes to asset pricing.

“You can’t anchor your expectations, especially now, from prior statements,” Commons said. “Buyers are going to be doing much more bottom-up asset-by-asset valuation with a huge amount of stress testing.”