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 coming in, 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 that investors put up more than the cash they promised during the easy money days of the pandemic.

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

The first signs of trouble are evident in the shrinking distributions these private market associations are handing out to investors, according to data from Burgiss Group LLC.

Five of the six private-market fund categories tracked by the research firm posted negative net commitments in the third quarter, meaning investors were required to put more money into them than they returned as returns. Buyout funds saw the biggest gap, at minus $7.66 billion, the most since the second quarter of 2020, the data shows.

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

Three of the fund types distributed the least 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 that oversees more than $50 billion. Portfolios known as trigger funds, which request capital from clients once certain thresholds are reached, have been among the most active in making capital calls, said the executive, who asked to remain anonymous to discuss internal matters.

“It is possible to imagine large institutions involved in the forced sale of liquid public shares to meet capital demands on private fund investments,” Benn Eifert, founder and chief investment officer of boutique volatility hedge fund QVR Advisors, wrote in his blog post. October letter to investors. .

Capital calls are not the only problem for investors in the private markets. Even his successes are creating headaches.

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

While this so-called denominator effect may be exaggerated, because there is a lag in the appreciation of private assets to reflect the latest market conditions, it has the potential to trigger a surge in selling at a time when it is least desired.

And the sums involved could be huge. A significant amount of the easy money pumped into the financial system by central banks during the pandemic found its way into unlisted assets, which grew to $10 trillion globally in September 2021, a five-fold increase since 2007, according to figures from the investment data firm Preqin.

“There is a kind of regime change in the macro world and in the markets that we need to monitor,” Stephen Klar, chairman and managing partner of Wellington Management Co., said at the Global Finance Leaders Investment Summit in Hong Kong in November. 3. “We are working with our clients to think about how to get asset allocation back to being more diversified and rebalanced.”

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