Secondary effects

The fact that many US and overseas endowments, including the much-lauded Harvard fund, are seeking to sell large chunks of their private equity portfolio is old news. What has surprised me is the lack of focus on why the problem surfaced.

True, there may be some marginal need to raise capital given the rapid falls in the listed markets. Yet a prudent asset allocation would have never exposed these funds to such a liquidity squeeze.

There are two factors at work. The first is plain old hubris - alternative assets, real estate and private equity all seemed to be heading ever higher, so Investment Committees put less and less into boring bonds, stocks and cash. This reached a point where some endowments had hardly any liquid assets at all: distributions from private funds were providing the cash to meet their obligations. Heavens, some pension funds even took stakes in the General Partners themselves!

The second factor was over-committing to some of the asset classes, particularly private equity. When the public markets turned, endowments and pension funds suddenly found themselves horribly over-exposed, with large capital calls outstanding. Hence the stampede into the secondary market. Although don't believe the public bid quotes - take that number and halve it, at the very least.