Institutions that commit capital to private equity funds have strict guidelines for asset allocation. For example, they may target a 5% allocation to private equity, 60% to listed equities, 10% to real estate, and so on.
Over the past year the prices of listed assets have collapsed, and the value of each investor's total portfolio, the denominator, has shrunk.
On the other hand, private equity investments have often held their value. This doesn't necessarily reflect the intrinsic value of these assets, but rather the fact that they are unlisted. Some limited partners only value their private equity investments periodically, others don't mark to market at all. The result? A 5% private equity allocation may have suddenly blown out to 20% or more.
A limited partner who needs to quickly address the denominator effect has only one option-- sell down some of his beloved private equity holdings, often at a substantial loss. For example, California's pension plan is believed to have sold down about 30% of its private equity holdings earlier this year. Harvard's endowment is reported to have offloaded $1.5bn in private equity holdings.
These sell-downs of LP interests are known as "secondary" sales. Here's a good article on secondary sales from Pension&Investments.
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