The sound of fund gates slamming shut is never welcome. But when it comes to private equity, investors should be less surprised than with real estate or private credit. Still, Wednesday’s news that Partners Group Holdings AG has capped withdrawals from a $8.6 billion vehicle aimed at rich people is troubling for an industry that has put the wealth market at the center of its growth plans.
Private equity has struggled to satisfy investors for years now because managers are finding it hard to sell portfolio companies for decent returns and hand cash back. Sentiment and fund raising have suffered; growing withdrawal demands from individual customers won’t help. But this is less of a problem than in private credit because these redeemable funds make up an even tinier portion of total assets in private equity. Most investors in the sector are big institutions that have willingly locked their money up for years,
Partners Group is a bit of an outlier. The Swiss private asset manager has long targeted the rich clients of private banks and is more dependent on them than many rivals, with almost 20% of its money from that source. It first launched these kinds of permanent private equity funds for the wealthy with redemption windows roughly 20 years ago.
However, the signal sent by its restriction of withdrawals from its Global Value SICAV evergreen fund weighed on the stock prices of listed peers as well as on Partners Group itself. Partners declined more than 17% on Wednesday, while EQT AB and CVC Capital Partners Plc both slipped more than 6%.
The gated fund had requests for nearly 10% of net assets to be redeemed, but has an automatic stop at 5%. The fund has plenty of spare cash to hand and could easily have met a higher level of redemptions, but Partners’ Chief Executive Officer David Layton said its mandate was to keep investing in deals and needed money available for that. Investors who really want their money will join a queue to get it back in future quarters. “Some of the redemption pressure that started in private credit has started to make its way over into other asset classes,” Layton told Bloomberg TV on Wednesday.
Despite Layton’s reference to broader industry pressures, the firm has had plenty of individual bad news lately. Its net inflows were relatively weaker in the first quarter, partly off the back of deteriorating performance, according to analysts.
In April, Partners Group was targeted by short-seller Grizzly Research, which claimed the firm was mismarking some assets. Partners called the report defamatory and misleading. To be fair, analysts at Citigroup Inc. wrote that the concerns seemed mostly overdone and surprising because Partners consistently got third-party valuation audits and had a record of selling businesses much closer to existing marks than European peers. Still, Layton said the short attack obviously hadn’t helped investor sentiment.
The motivations of investors demanding withdrawals aren’t clear. Aside from factors specific to Partners Group, there are likely concerns about returns from private equity getting hit by bad software bets just like in the private credit sector. At the same time, many of the world’s rich will be hoping to get in on the upcoming monster stock listings of SpaceX and other artificial intelligence companies, and thinking about what they can sell to free up cash to put in. That could keep adding to the drag on weaker performing alternative asset managers.
For private equity broadly and the financial system as a whole this trend ought to be less of a concern than it is for private credit. Evergreen, or semi-liquid funds focused on the wealth market, have been growing quickly with hundreds of new launches each year, but total assets account for little more than 5% of all industry funds, versus nearly 15% of private credit money coming from retail-friendly funds.
Banks, meanwhile, do have some exposure to private equity funds, but mostly secured against investment commitments of large institutions. That’s different from private credit, where leverage from banks to boost fund returns is part of the normal course of business.
Private equity investors should be less shocked than anyone else that they can’t get their money back easily. Credit and property funds both produce regular cash income for managers, while private loans have a typically shorter maturity than private equity. Also, selling a business is always going to be harder than selling a property or even a private loan. And that’s been especially true in recent years.
Partners Group’s fund gating is bad news for the firm itself and not great for the industry. Thankfully, it matters much less for everyone else.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
This article was provided by Bloomberg News.