(Bloomberg) – The private market is on its way to collecting – and it threatens to wreak havoc on global stocks and bonds.
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With financial conditions tightening around the world, private market funds are asking investors to raise more of the cash they pledged during the easy-to-get days of the pandemic.
While it is expected that many large pensions and endowments will have sufficient cash flow to meet these capital demands, the fear is that a large number of other investors will have to offload liquid assets to meet obligations. That could likely mean deeper losses in the general equity and debt markets, where returns have already fallen more than 20% this year.
Early signs of trouble are in the shrinking distributions that private market partnerships are making to investors, according to data from Burgiss Group LLC.
Five of the six classes of private market funds tracked by the research firm posted negative net correlations in the third quarter, meaning investors are required to put more money into them than returns. The data showed that buyout funds saw the largest gap, at minus $7.66 billion, the largest amount since the second quarter of 2020.
“We see cause for concern,” Burgess analysts Patrick Warren and Louis O’Shea wrote in a note last month. “Net investment capital distributions are now at their lowest in several decades, and large and bad debts are calling for capital on the grid.”
Three types of funds have distributed the lowest amount of money to investors in at least seven years.
Requests for capital have accelerated this year, particularly for private trust funds, a senior executive from an institutional investor who oversees more than $50 billion said. The executive, who requested anonymity to discuss internal matters, said portfolios known as operating funds, which demand client capital once certain thresholds are met, have been among the most active in making capital calls.
“It is conceivable that large institutions will force the sale of liquid public equity to meet demands for capital in private fund investments,” Ben Evert, founder and chief investment officer at hedge fund QVR Advisors, wrote in his October letter to investors. .
Capital calls are not the only problem for investors in private markets. Even their successes create a headache.
As many alternative assets have outpaced the public markets in recent years, institutions have gone beyond previous fixed limits on the proportion of their portfolios that can be allocated to private markets.
While this purported effect of the denominator may be exaggerated – as there is a delay in revaluation of private assets to reflect the latest market conditions – it is likely to lead to increased selling at a less desirable time.
The amounts involved can be huge. A large amount of easy money that central banks pumped into the financial system during the pandemic has found its way into unlisted assets, which grew to $10 trillion globally by September 2021, a fivefold increase from 2007, according to figures from investment data firm Preqin.
Stephen Clare, president and managing partner of Wellington Management Co. , at the Global Financial Leaders Investment Summit in Hong Kong in November: “There is some sort of systemic change in the macro world and the markets that we need to control.” 3. “We are working with our clients to think about how we can reallocate assets in a more diverse and balanced way.”
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