Private Equity Funds Were ‘Way Over-Marked,’ Endowment Chief Says

Texas Christian University’s Chief Investment Officer Jason Safran noted that private equity funds are correcting inflated valuations after years of overly optimistic markets, as "investor patience wears thin" and exits become more difficult.

Safran told the audience during a panel discussion at Bloomberg’s Invest Dallas conference that valuations from 2022 to 2024 "were way overmarked," the publication reported. 

"The private equity world is now overall better-marked than it was a couple years ago," he said.

Investors are now looking to offload their investments, often selling below market value, or are looking to roll them into continuation vehicles, he explained.

A Growing Backlog Of Unsold Deals

Private equity firms are sitting on a huge pile of aging investments, with 33% of U.S. buyout deals from 2017 yet to be sold nearly a decade later.

The backlog is becoming harder to ignore as another wave of investments approaches the point when sponsors would typically look to cash out, according to a new PitchBook report. 

The problem is not simply that private equity firms are holding companies longer. Higher financing costs and uncertainty around future earnings have made it harder for potential buyers to justify the valuations sellers are seeking.

The 2021 Vintage Faces A Long Road Ahead

The backlog could become even more difficult as the record-setting 2021 vintage ages. Only 18% of the 2021 cohort had been monetized four years after investment, compared with 31.9% of the 2017 cohort at the same point. If exits remain at the current pace, PitchBook estimates less than half of the 2021 cohort would be wound down over a 10-year investment cycle.

PitchBook acknowledged the calculation is a simplified extrapolation, but said the takeaway is straightforward: “To clear the inventory accumulated during the peak dealmaking years, exit activity will need to accelerate meaningfully.”

Olivia Newell, managing director and head of Texas at Partners Capital, told Bloomberg that some funds are taking a more cautious approach to valuations, opting to start low and raise marks over time rather than having to cut them later. 

She warned that lowering a portfolio company’s valuation at the point of sale could seriously damage a fund’s credibility. 

Photo: Shutterstock