Investors are selling their private equity holdings at a discount on secondary markets in order to reduce exposure to the asset class. Last year, there was $112 billion in secondary market transactions, the second-highest since 2017. According to Jefferies, 99% of private equity transactions were made at or below net asset value last year. This is an increase from 95% and 73% in 2022 and 2021, respectively. 

It’s a result of the depressed atmosphere for M&A and IPOs, which have been the typical path for private equity exits. However, these outlets have been offline for most of the past couple of years due to the Fed hiking rates to combat inflation. 

Many of the sellers have been pension funds that are required to make regular payments to beneficiaries. Prior to this cycle, private equity was lauded for its steady returns and low volatility, leading pension funds to increase allocations from 8% in 2019 to 11% last year. 

Private equity’s appeal has also dimmed, given that higher rates can be attained with fixed income and better liquidity. In contrast, private equity thrived when rates were low, as it led to robust M&A and IPO activity in addition to more generous multiples. 

One silver lining is that as the Fed nears a pivot in its policy, there has been some narrowing of discounts. According to Jefferies, the average discount from net asset value has dropped from 13% to 9%. 

Finsum: Many investors in private equity are exiting positions at a discount due to liquidity concerns. Now, some institutional investors are rethinking their decision to increase allocations.