(Bloomberg) — Investors looking to offload their stakes in private funds are letting buyers push back their payments by months rather than accept a big discount on the price.
They’re increasingly using “deferrals”, which allow buyers to make part of the payment upfront and the rest at an agreed date in the future. As elevated interest rates erode returns for private equity and private credit funds, making them less attractive, buyers have been able to push for increasingly appealing terms.
“We’re seeing much more back-weighted deferred payments and terms stretch out to 18 months from a year,” said Richard Chow, managing director at PJT Park Hill, an alternative asset advisory firm. The instrument is an “extremely powerful mechanism” to help sellers get a better price, said Chow, who was speaking specifically about the private equity market.
Deferrals have become more common in the past several years and terms are now more borrower-friendly. A survey this year of 100 secondary-market participants conducted by private markets advisor Campbell Lutyens found that 63% of respondents used deferrals in 2023, up from 50% the previous year. More than half of transactions had at least 60% of the full payment deferred, a 17 percentage points increase from the 2022 figure.
Sluggish M&A
The trend is a symptom of the lack of liquidity investors are suffering due to a sluggish M&A environment. Despite green shoots with some major deals this year, the private equity machine has rebounded at a slower pace than initially expected. Speakers at private equity’s big meet up this June painted a dreary picture of returns.
Private equity funds have cast around for different ways to return money to their investors, including tapping private credit for fund-level financing. However, many owners of positions in private funds are taking matters into their own hands by turning to the secondaries market, where slices of private funds can be bought and sold.
The secondaries market for private funds is still very young compared to other asset classes. Chris Jeffery, general manager of Palico, which operates an online marketplace, says the use of deferrals is creating a layer of complexity that could stall progress toward standardization. Palico is pushing for the use of upfront payments instead.
Use of deferrals could decrease over time as sellers start to face more pressing liquidity needs, according to a report published by private fund placement agent Eaton Partners earlier this year.
Still, pricing data indicates that the deferral strategy is effective in helping sellers avoid having to offer large discounts. The percentage of net asset value that buyers paid for private infrastructure, credit and buyout funds ticked up in the first half of the year, according to a Secondary Market Insight report published by PJT Partners.
It may also be helping to keep the market active. Secondary market volume reached $70 billion in the first half of 2024, a 40% increase on the same period the previous year, according to the PJT report, which estimates that volumes will reach $145 billion for the full year.
Deals
- Saudi Arabia’s sovereign wealth fund is one of the co-investors that lost money on Vista Equity Partners’ acquisition of Pluralsight Inc.
- Care home and retirement housing firm Anchor has borrowed £85 million ($112.5 million) from Legal & General Assurance Society Ltd. to build affordable housing in the UK after the government promised to dramatically boost supply
- Blackstone Inc. provided an incremental term loan to Loar Holdings Inc. to support its acquisition of Applied Avionics Inc., which closed on Monday
- Private equity firm Blackstone Inc. is in discussions with banks for a five-year loan of about A$5.5 billion ($3.7 billion) to back its bid for Australian data center operator AirTrunk
- Vista Equity Partners is in talks with both Wall Street banks and direct lenders to obtain around $1 billion of debt financing to support its acquisition of software company Jaggaer
- Australian developer Yarra Park City Pty. Ltd. has raised a A$265m 4.5Y syndicated loan that backs the second stage of a mixed-used development project in Southbank, Melbourne
- Private credit lenders have agreed to take ownership of Pluralsight Inc., three years after Vista Equity Partners bought the educational-software company, in a markedly swift unraveling of a private equity investment
- Budget carrier AirAsia Bhd has secured a $443 million dual-tranche private financing to use partly for refurbishing planes grounded during the pandemic
Fundraising
- CCS Partners, a credit manager focused on structured and private asset-based deals, launched this month and raised $4 billion in commitments
- Stifel Financial Corp. is forming a new direct-lending joint venture with partners including a credit manager owned by Franklin Resources Inc. amid a growing wave of such partnerships
- A unit of Singapore’s state-owned investor Temasek Holdings Pte. has raised $1.3 billion for its second private credit fund, in a sign that Asia’s fledgling direct lending industry remains attractive to investors hungry for yield and asset diversification
Job Moves
- Texas Municipal Retirement System is hiring three investment staff as it looks to expand direct investment capabilities in private markets
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