Challenges in the current private equity landscape

Torys partner Meghan McKeever and senior associate Aaron Hunt spoke with the CAiP about the current private equity landscape.

“Since the start of the ongoing interest rate hike cycle from the Federal Reserve/Bank of Canada and the corresponding market correction, certain institutional limited partners have seen their allocations to private equity and other private assets become relatively ‘overweight’ in their portfolio as a result of declining public market valuations,” Meghan and Aaron said.

“This is commonly known as the ‘denominator effect’ and has led to a pullback in respect of certain institutional investors from committing new capital to private funds. In addition, there is a general sense of caution among many institutional investors to avoid deploying too much capital into an uncertain market.”

Looking ahead to 2024, Meghan and Aaron noted the scarce capital available to investors in the current challenged markets.

“There has been a greater focus on ‘re-up’ subscriptions to larger managers with established track records with which investors are already familiar with a commensurate reduction in subscriptions to first time funds and other smaller managers that are viewed as less ‘safe’ from an investor perspective,” they said.

Meghan and Aaron continued on, commenting on solutions they’ve seen in the market to address liquidity issues.

“Many GPs are also exploring the idea of continuation vehicles and other ‘GP-led’ secondary sale models in order to provide additional capital to challenged portfolio assets or to extend the hold period for certain assets to avoid exiting in a down market. Once viewed as a signal of a sponsor’s or a fund’s distress, continuation funds are now often considered by sponsors as a means to secure the time and fresh capital necessary to take a well-performing investment to the next stage,” they explained.

You can read more about our Private Equity and Principal Investors work on our practice page.

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