Continuation of the Trend into 2024
Sources, including family offices, fund of funds, trustees, private banks, and sovereign wealth funds overseeing trillions of dollars in assets, predict that this trend will continue into 2024. Michael Oliver Weinberg, a former portfolio manager and board member at Dutch pension fund APG, now teaching at Columbia Business School, explains that institutions do not want to sell their private equity holdings as they face the likely discounts that the market will apply. Weinberg comments that pension funds and endowments have been obligated to sell even their outperforming liquid hedge funds to meet their capital calls.
Investments in private equity and venture capital are typically determined in advance, but the actual payments, or “capital calls,” are made incrementally. Institutions believe that these private equity and venture capital portfolios have declined in value and are therefore attempting to free up cash due to increased costs and pressure to maintain returns. Neil Datta, a seasoned hedge fund investor, highlights the challenges faced by endowments, especially given the high proportion of funds allocated to private investments in recent years. Investors are redeeming their investments as they need cash to reorganize their finances.
Private equity buyout and venture capital funds, during the first half of 2023, requested $66 billion more from investors than was paid out in profit, as indicated by MSCI data. Global M&A deal volumes in the first eleven months of 2023 reached a ten-year low based on LSEG data. Additionally, initial public offering (IPO) volumes have fallen to a seven-year low in the year leading up to Wednesday. Columbia’s Weinberg highlights the situation, stating that investors were drawn to private equity under the assumption of low rates, higher valuations, and profitable exits. However, interest rates have risen, IPO markets are weak, and M&A activity has diminished, resulting in a lack of expected profit distributions.
These outflows pose challenges for hedge funds and have an opportunity cost for public pensions and university funding. Institutions require investments that generate current returns. Neil Datta explains that investors are redeeming from systematic and quantitative hedge funds, even if they might not necessarily want to, to avoid selling their less liquid investments at discounted prices. However, deciding to take chips off the table means potentially missed opportunities for future gains, particularly considering the expected continuation of volatility.