Billions in capital calls threaten to wreak havoc on global stocks and bonds

Billions in capital calls threaten to wreak havoc on global stocks and bonds

(Bloomberg) – The private market is picking up – and it’s threatening to wreak havoc on global stocks and bonds.

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As financial conditions tighten around the world, private market funds are demanding investors hoard more of the cash they pledged during the easy money days of the pandemic.

While many large pensions and endowments should have sufficient cash flow to meet these capital calls, the fear is that many other investors will have to shed liquid assets to meet the obligations. That would likely mean even bigger losses in the public equity and debt markets, where yields have already fallen more than 20% this year.

According to data from Burgiss Group LLC, the first signs of trouble are evident in the shrinking distributions these private market partnerships are offering to investors.

Five of the six private market fund categories tracked by the research firm saw negative net commitments in the third quarter, meaning investors had to pour more money into them than they brought back. Buyout funds saw the biggest gap, at minus $7.66 billion, the most since the second quarter of 2020, the data showed.

“We see cause for concern,” Burgiss analysts Patrick Warren and Luis O’Shea wrote in a note last month. “Net venture capital distributions are now at multi-decade lows, and senior and distressed debt are also calling for capital on the net.”

Three of the fund types have distributed the lowest amount of money to investors in at least seven years.

Capital calls have accelerated this year, particularly for private credit funds, said a senior executive at an institutional investor overseeing more than $50 billion. Portfolios known as trigger funds, which request capital from clients once certain thresholds are met, have been among the most active in capital calls, the executive said, requesting anonymity to discuss internal matters.

“It is possible to imagine large institutions engaging in the forced sale of liquid public stocks to meet capital calls in private fund investments,” wrote Benn Eifert, founder and chief investment officer of the hedge fund. volatility QVR Advisors, in its October letter to investors. .

Capital calls are not the only problem for private market investors. Even their successes create headaches.

As many alternative assets have outperformed public markets in recent years, institutions have exceeded limits on the proportion of their portfolios that can be allocated to private markets.

Although this so-called denominator effect may be exaggerated – as there is a lag in the revaluation of private assets to reflect the latest market conditions – it has the potential to trigger increased sales at a time when it is the less sought after.

And the sums at stake could be colossal. A significant portion of the easy money injected into the financial system by central banks during the pandemic ended up in unlisted assets, which reached $10 trillion globally in September 2021, a fivefold increase. compared to 2007, according to figures from investment data firm Preqin.

“There’s a kind of regime change going on in the macro world and in the markets that we need to get a handle on,” Stephen Klar, chairman and managing partner of Wellington Management Co., said at the Global Financial Leaders’ Investment Summit in Hong Kong. on November 3. “We are working with our clients to think about how to really bring this asset allocation back to a more diversified and rebalanced way.”

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