LACERA's staff named exits of unsold portfolio companies as one of its two “investment concerns” related to investing in Silver Lake's fourth fund, according to a staff memo for the Feb. 13 board of investments meeting. The staff noted Silver Lake has about $7.6 billion invested in 24 still active companies. Some 70% of the capital invested in Silver Lake's second fund, which closed in 2004, and 75% of the capital invested in Silver Lake's third fund, which closed in 2007 is still active.
And it's not just Silver Lake. LACERA staff noted in the memo that a “lingering impact of the financial crisis is the large quantity of unsold portfolio companies building up in large buyout funds.”
Andrew R. Cristinzio, McLean, Va.-based partner in PricewaterhouseCoopers LLP's deals practice, estimated the overhang in assets is double 2006 levels.
“If you look at private-equity-backed portfolio companies back at pre-crisis levels, current private-equity-backed portfolio company overhang at the end of 2012 was somewhere around 6,500, which is estimated to be double that of the pre-2006 period,” said Mr. Cristinzio, citing PitchBook data.
Indeed, of the more than $3.27 trillion in total worldwide private equity assets under management as of Sept. 30, $2.27 trillion is “unrealized portfolio value” or unsold portfolio companies, according to data prepared for Pensions & Investments by Preqin, a London-based alternative investment research firm.
The worst offender in terms of vintage year is 2007 funds, which as a group have the highest unrealized value of portfolio companies — $527 billion — compared with total assets under management of $617 billion, the Preqin data show.
When Preqin compared the proportion of private equity companies invested in each year since 2006 that are still being held by fund managers, 70% of companies invested in throughout 2006 are still being held, said Nicholas Jelfs, Preqin senior analyst and press officer.
The overhang in unsold private equity portfolio companies has never been higher in the history of the asset class, asserted Michael G. Fisch, president and CEO of American Securities LLC, a private equity firm in New York.
“The overhang that is not sufficiently talked about is not the overhang of capital, but the overhang of older portfolio companies and older funds that have not been sold and need to be sold,” Mr. Fisch said.
What ends up happening to this glut of unsold portfolio companies could have a big impact on the private equity industry.
Some firms can't sell some of their portfolio companies because they are worth less than their original investment, Mr. Fisch said.
“What will happen to them? Who will buy them? When will they get sold? What will happen to the returns of the industry when they do get sold?” Mr. Fisch asked.
Every situation will be different, he said. If a manager's relationship with the firm's limited partners is good, investors will give the general partners more time to sell their portfolio companies.
Where the general partner-limited partner relationship is not good, the entire private equity fund might be sold to another general partner, or investors might bring in a new general partner because they have lost faith in the original one, Mr. Fisch said.