🏆 Private Equity firms reported 1.6% gains for Q1 2022 in a year where global equities lost 22% (FT). NAVs are up!
However at the same time, a record $57bn of PE funds changed hands in H1 2022, at an average price of 86% of the NAV.
So…NAVs are up but 𝐚𝐜𝐭𝐮𝐚𝐥 𝐭𝐫𝐚𝐝𝐞𝐬 𝐡𝐚𝐩𝐩𝐞𝐧 𝐚𝐭 14% 𝐝𝐢𝐬𝐜𝐨𝐮𝐧𝐭. Interesting, isn’t it?
📈 In “𝐏𝐫𝐢𝐯𝐚𝐭𝐞 𝐄𝐪𝐮𝐢𝐭𝐲”, there is “𝐄𝐪𝐮𝐢𝐭𝐲”. And there is no reason why the drivers of the repricing of Equity in 2022 should not apply to Private Equity also.
The inflated and abnormally stable PE NAVs is a phenomenon that seems to be in everyone’s interest: Three academics recently argued that PE funds tend to boost interim performance returns to cater for some investors’ demand for manipulated returns. Indeed some investors do not want to see the mark-to-market and are happy to received those manipulated NAVs.
📈According to AQR Capital Management‘s co-founder Cliff Asness “the amount people will pay to an industry to make decently less than a moderately levered S&P 500 index fund, so they don’t have to watch the S&P 500 index fund, is staggering.. it’s “Volatility Laundering”. In other words, investors pay a premium for illiquidity, or rather a premium for voluntary blindness! In poker you may pay to see, in PE you pay not so see!
📈That obviously all goes well as long as the “𝐄𝐪𝐮𝐢𝐭𝐲” in “𝐏𝐫𝐢𝐯𝐚𝐭𝐞 𝐄𝐪𝐮𝐢𝐭𝐲” keeps going up medium to long term, and as long as investors hold to their positions. But if not?
🎁 If the S&P was the “S&PE” it would probably look like the below and attract a fair amount of money… including mine!
“𝘛𝘩𝘦 𝘷𝘰𝘭𝘢𝘵𝘪𝘭𝘪𝘵𝘺 𝘭𝘢𝘶𝘯𝘥𝘦𝘳𝘪𝘯𝘨, 𝘳𝘦𝘵𝘶𝘳𝘯 𝘮𝘢𝘯𝘪𝘱𝘶𝘭𝘢𝘵𝘪𝘰𝘯 𝘢𝘯𝘥 ‘𝘱𝘩𝘰𝘯𝘦𝘺 𝘩𝘢𝘱𝘱𝘪𝘯𝘦𝘴𝘴’ 𝘰𝘧 𝘱𝘳𝘪𝘷𝘢𝘵𝘦 𝘦𝘲𝘶𝘪𝘵𝘺” Robin Wigglesworth (𝘍𝘛 𝘈𝘭𝘱𝘩𝘢𝘷𝘪𝘭𝘭𝘦, 2 𝘕𝘰𝘷𝘦𝘮𝘣𝘦𝘳 2022)
“𝘊𝘢𝘵𝘦𝘳𝘪𝘯𝘨 𝘢𝘯𝘥 𝘙𝘦𝘵𝘶𝘳𝘯 𝘔𝘢𝘯𝘪𝘱𝘶𝘭𝘢𝘵𝘪𝘰𝘯 𝘪𝘯 𝘗𝘳𝘪𝘷𝘢𝘵𝘦 𝘌𝘲𝘶𝘪𝘵𝘺” 𝘉𝘭𝘢𝘬𝘦 𝘑𝘢𝘤𝘬𝘴𝘰𝘯, 𝘋𝘢𝘷𝘪𝘥 𝘓𝘪𝘯𝘨, 𝘈𝘯𝘥𝘺 𝘕𝘢𝘳𝘢𝘯𝘫𝘰 (𝘚𝘚𝘙𝘕 𝘱𝘢𝘱𝘦𝘳 15 𝘋𝘦𝘤𝘦𝘮𝘣𝘦𝘳 2022)
“𝘞𝘦𝘢𝘭𝘵𝘩𝘺 𝘐𝘯𝘷𝘦𝘴𝘵𝘰𝘳𝘴 𝘗𝘪𝘭𝘦 𝘐𝘯𝘵𝘰 𝘗𝘳𝘪𝘷𝘢𝘵𝘦 𝘌𝘲𝘶𝘪𝘵𝘺 𝘵𝘰 𝘌𝘴𝘤𝘢𝘱𝘦 𝘚𝘵𝘰𝘤𝘬 𝘝𝘰𝘭𝘢𝘵𝘪𝘭𝘪𝘵𝘺” 𝘊𝘩𝘳𝘪𝘴 𝘊𝘶𝘮𝘮𝘪𝘯𝘨 (𝘞𝘚𝘑 26 𝘔𝘢𝘺 2022)
𝘊𝘭𝘪𝘧𝘧𝘰𝘳𝘥 𝘈𝘴𝘯𝘦𝘴𝘴 𝘰𝘯 𝘛𝘸𝘪𝘵𝘵𝘦𝘳.