Trading of Private Equity Stakes Will Plummet This Year

The secondary market is in a lull as investors wait for clarity surrounding private equity valuations, according to Commonfund.

Brent Lewin/Bloomberg

Brent Lewin/Bloomberg

The market for trading private equity stakes has largely dried up, as investors wait to learn the extent of damage done to fund holdings in the coronavirus turmoil, according to asset management firm Commonfund.

The lull in secondary trading may extend past June as private equity firms slowly mark down their portfolios, said Cari Lodge, head of secondaries at Commonfund. Deal volume in the secondary market could drop as much as 55 percent this year, from a record $88 billion in 2019, as investors remain wary ahead of a looming drop in valuations, she said.

“You’re not going to see deal flow pick up again until secondary funds have their 6/30 marks,” Lodge said in a phone interview. “We also probably need to get a discount to get our returns.”

The fast and hard fallout from the coronavirus pandemic in public markets last month is taking time to trickle through to valuations in the private markets, which typically are marked quarterly. Some investors may suddenly find they’re over-allocated to private capital because the value of their public assets plunged in the sell-off during the first quarter. But unloading their stakes won’t be an easy task.

Bid-ask spreads in the secondary market are now wide, making it hard to get deals done, according to Lodge. Pricing last year had remained elevated as investors were then transacting in the record-length bull market, she explained, adding that deal flow will be held back until investors have clarity surrounding this year’s private equity marks.

Still, pockets of distressed investment opportunities may arise where sellers, under pressure and in need of cash, are willing to accept large discounts for their stakes in funds.


“Investors that are tied to the oil market, because of the distress there, might see a need for more liquidity than others who are less invested in the sector,” Lodge said. “We might see an increase in volume from people whose portfolios were weighted more heavily there.”

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Secondary investors may also be willing to buy stakes in young funds or portfolios with companies appearing to benefit from the pandemic, according to Lodge.

For example, investors may find luck selling technology-oriented deals seen as performing well in an environment where people are staying at home due to the coronavirus, she said. Online gaming or video conferencing businesses could also do well under this scenario, Lodge suggested.

The pandemic also appears to be driving business to a corner of the wine industry., a company Commonfund picked up under a secondary purchase of a portfolio before the coronavirus, has seen a big jump in demand during the shutdown, according to Lodge. A message posted in the center of the online distributor’s home page reads: “Wine delivered right to your door.”

Stakes in newer private equity funds might also draw interest from secondary investors because these pools will be investing at lower prices during the downturn, according to Lodge. That’s attractive to secondary buyers because of the potential for bigger gains, while possibly helping sellers that would be faced with a liquidity crunch if private equity firms called for previously committed capital.

The secondary market may see “some younger assets selling,” Lodge said, as investors might like to “get out of their unfunded commitments.”

Secondary investors might also come across preferred securities deals, according to Lodge. She explained that private equity firms may set up special investment pools to buy preferred stock of struggling companies they own, helping to shore up their liquidity in the pandemic.

“You saw it with some of the natural resources assets over the last few years,” Lodge said.

For now, though, a strong recovery in secondary market activity seems months away due to the uncertainty surrounding private equity valuations.

“I don’t think there will be a ton of deal flow in the second or third quarters,” said Lodge. “As the situation normalizes in the fourth quarter, we expect to see a lot of deal flow.”