Secondary PE Fund Performance Alert

A cynical Sunday Secondary Puzzle

SECONDARY PE FUND *PERFORMANCE* ALERT

A Cynical Sunday Secondary Puzzle!

Last week, the NYC Comptroller announced the sale of $5 billion of private equity investments from NYC pension funds. The sale attracted 80 potential bidders. Eighty!

Evercore (a firm that is clearly tuned into the secondary market) handled the transaction on NYC’s behalf. It wasn’t done in haste: according to an Axios report, the sale process started over a year ago.

The Buyer of the stake: Blackstone.

The price of the stake: (very likely) some discount to NAV (the values assigned to the various investments by the managers (General Partners) of said investments.

Ok, the puzzle: Is the current carried value of these investments:

1. The price Blackstone paid last week, or

2. The higher NAV value?

A: For Secondary Cynics, the answer is easy! It’s 2, the higher NAV value!

Here is a snippet from the Blackstone Private Equity Strategies Fund 10-Q, a possible destination for these investments:

“Investments in affiliated or unaffiliated investee funds (“Investee Funds”) are generally valued using the reported net asset value (“NAV” or “Net Asset Value”) of the Investee Funds as a practical expedient for fair value.”

At the Alt View, we wonder: At what point can a secondary transaction be considered rigorous and deliberate enough such that the carrying value of the assets purchased should?/must? be the amount paid, rather than the (higher) NAV, which facilitates an instant gain?

Note: Secondary PE funds, many quite small, are showing some INCREDIBLE performance right out of the gate. In a market full of discounted PE assets, it would seem impossible NOT to have impressive performance.

We also wonder: would secondary PE investment managers market their initial, awesome performance of said funds as though it reflected anything other than NAV squeezing? Would financial advisors that often make a front-end load selling said funds favor funds that are easier to sell?

They wouldn’t, would they?

To be clear, we have no idea how Blackstone is marketing these funds. But investors care about past performance. NAV squeezing is, by its nature, a different type of *performance.* Some (maybe even people that don’t consider themselves cynical!) might argue that it isn’t performance at all.

Sometimes ‘long-term” money turns out to be hot money.

We had a reader, a financial advisor, reach out and share his strategy (this is NOT our strategy, we’re just sharing his); invest in secondary funds for the early, big NAV markups, get out early, make a tidy profit. Who knows, maybe it’ll work for some investors in these (limited-liquidity) products.

BE CAREFUL OUT THERE!