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Jeffrey Barnett

Financial Advisor @ Fintegrity® | Wealth Management, Retirement Planning

Firms are aggressively marking up private equity stakes bought in secondary market Funds are claiming big one-day windfalls in the secondary market for private-equity stakes. For example, "the last day of September 2023 was very good for Hamilton Lane Private Assets Fund. It recorded a 39% gain on a group of investments it bought the day before for $52 million, giving a quick boost to the fund’s performance. Of the three dozen investments it bought on Sept. 29, nearly half had more than doubled in value on Sept. 30. The Hamilton Lane fund’s stake in a fund that focuses on Latin America rose eightfold in 24 hours," according to the Wall Street Journal. StepStone Private Venture and Growth Fund report even more remarkable gains, marking up investments by multiples in a single day. "Other secondary investors that have reported significant markups include Pomona Investment Fund and Ares Private Markets Fund. On June 30, 2023, for example, the Pomona fund bought a stake in an Asia-focused Bain Capital fund for $3.1 million and wrote it up 62% the same day. The Ares fund paid $32.8 million on Dec. 29, 2023, a Friday, for a stake in a Blackstone fund and said its fair value was 70% higher two days later." Although an investor who wants out early may be willing to sell its stake at a big discount, "...the significant markups raise questions about the true fair value of the investments. The secondary market volume for private-equity funds hit $112 billion in 2023." 💰 “With such large day-one gains, investors may take pause to consider whether such fair-value figures are too good to be true,” said Tom Linsmeier, an accounting professor at the University of Wisconsin and a former member of the Financial Accounting Standards Board, which sets U.S. accounting rules. "Under U.S. accounting rules, an asset’s “fair value” is the price it would sell for in an orderly transaction on a given date. The classic example is a public company’s stock. For holdings that don’t trade regularly, estimating fair value often is more difficult and more subjective." "The markups also point to a potentially broader issue: What if the discounted prices on the secondary market are the more accurate gauge of the investments’ real-life values? Then the asset values for stakes on countless other investors’ balance sheets may be inflated. The NAVs reported by private-equity funds have been long questioned because of their lack of volatility."💡 Overly generous valuations are a risk often overlooked by private equity fund investors. #PrivateEquity #Investments #FinancialMarkets

Funds Are Booking Big One-Day Windfalls Buying Private-Equity Stakes

Funds Are Booking Big One-Day Windfalls Buying Private-Equity Stakes

wsj.com

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