UPDATE The story has been updated to include additional comments from Liaudet.
Desperate private equity and venture capital limited partners are considering paying “negative premiums” to secondary buyers in order to get out of their investments. This goes beyond a simple discount to net asset value (NAV). This means limited partners actually hand over cash to secondary buyers in exchange for taking over their stakes. It’s music to a secondary buyer’s ears after years of paying actual premiums for LP stakes.
The return of the negative premium isn’t shocking, as discounts on the secondary market sink from 50% of NAV all the way to 100%. LP interests were exchanged at negative premiums in the aftermath of the venture bubble as well. However, it’s slightly different this time, because this backward pricing is a result of LP capital constraints and not the performance of the underlying funds, according to intermediaries I spoke with.
Thus far, the negative premium is limited mostly to mega-funds deployed in 2006 and 2007 or later. Investors desperate for cash know those funds won’t be distributing any capital to investors anytime soon, and are in such a hurry to get out of future capital calls that they will part with some cash in order to do so. The negative premium exchange isn’t happening on a large scale yet, but it won’t stop buyers from asking.
At Friday’s Private Equity Secondaries conference, Thomas Liaudet, a Principal at intermediary Campbell Lutyens, displayed a “wish list” email from a prospective buyer with specific requests for funds that paid negative premiums.
Liaudet said that negative premiums have become more common for secondary buyers because they are not willing to take on a larger exposure to undrawn capital. Pricing remains an LP issue and not a reflection of the underlying funds. There are a number of large European funds from which investors are “fleeing from at any cost,” he said, because these LPs are stressed or distressed and need liquidity and seek to rid themselves of undrawn risk.
Previous coverage from this conference:
Secondary Quote of the Day II: “We’ve been feeding investors two drugs”
Secondary Quote of the Day I: “Things are often popular for the wrong reasons.” –
How Can Secondaries Bring Liquidity to Cash-Constrained Fully Invested Funds?
Secondary-Palooza Still Waiting On The “Palooza“