We’ve picked our top 10 private equity stories of 2009, and have been running our selections for the past couple weeks on this blog. If you missed the rest of the list, just check the end of this post for a roundup.
Today, we’ve reached number one: desperately seeking liquidity.
This topic came in at number two in our top 10 stories of last year, but this year we are bumping it up one notch. Despite recoveries in public stock markets that have lessened the urgency of liquidity problems for private equity investors of late, we think the full-on panic limited partners went through early this year will continue to influence their decisions on how, where and when to invest for a long while to come.
The institutions that are at the heart of the private equity asset class universally ran into liquidity problems worse than they had imagined could exist early this year. As stock markets declined, and cash flowing back to their portfolio from their alternative investments diminished to near zero, there was the very real fear that these institutions - foundations, endowments, pension funds and others - would literally not be able to meet their capital obligations to funds.
That fear was heightened by a few well-publicized instances of trouble - Lehman Brothers’ estate, for instance, defaulted on some capital calls, while fund of funds HRJ Capital sought to shore up its balance sheet by being acquired by Capital Dynamics. The problems at listed fund of funds Candover Investments ultimately led to the winddown of its primary investment, Candover Partners’ latest fund.
As the stock markets began their recovery in the second quarter, the fear of widespread defaults decreased, but LPs are still pondering the lessons learned about the dangers of illiquidity. MSCI Barra found in December 2009 that 59% of respondents to a survey now rate liquidity risk as being important.
The new emphasis on this is already playing out in multiple ways. You can see it in the fund size cuts that took place throughout 2009, and may continue in 2010. You can see it in the increased power that LPs have gained in negotiations over fund terms and conditions, like management fees and carried interest. You can see it, too, in the lockdown on private equity commitments that many LPs put into place and are only now considering lifting.
We think it’ll continue to have an impact down the road in other ways, as well. As to how, one idea surfaces in the minutes of a fall Washington State Investment Board meeting, in which board members discuss asset allocation. Results of a risk philosophy study carried out earlier in the year indicated that WSIB, one of the biggest private equity investors, should cut its allocation to private markets by 5%. (The pension fund has taken no action to cut its private equity allocation.)
Numbers two and three: problems in venture and the pay-to-play scandal
Number four: Mr. Heesen goes to Washington
Number five: the return of risk
Number six: dealing with debt
Number seven: secondary market fail
Number eight: the return of IPOs, sort of
Number nine: the European equation
Number ten: BRIC is back