Transcription
Private equity has now entered a new and, I should say, very dangerous phase where generating liquidity has become more important than generating return for its investors. What's happening, folks, I've been covering is they can't sell enough private equity assets to generate the cash flow that the system needs to pay their investors. And the result is this.
I'm going to share with you a couple stories today that pension plans and endowments are now selling, I should actually say dumping their existing fund interests on the secondary market. There are two reports out, one from the Financial Times, one from Bloomberg, that explains what is going on.
As we know, private credit over the last several years has binged on thousands of companies during the era of near zero, you know, interest rates. Most of those being either startup companies or companies that were troubled. They thought they could make them profitable, turn them around, uh, take them public and or otherwise sell them. But as rates rose, the buyers dried up, the IPOs slowed, uh, and these dead companies have stayed on their books and in these portfolios much longer. So cash distributions to pension funds and the other investors in these private equity funds has basically come to a standstill or certainly a trickle.
So, what the FT reported yesterday, uh, pension funds and institutional investors are not waiting any longer. They're selling their private equity interest at discounts just to generate liquidity. Okay? To do this, they're using what are called secondary transactions, which is when an intermediary buys their positions, cashes them out at a loss. I'll cover that in a second, and then steps into that position.
This is a $240 billion story, folks. According to Jeffre, the global private equity secondary market reached $240 billion in transaction volume in 2025. That's up nearly 50% in a single year after already setting a record the year before. And you won't believe what the secondaries are doing once they cash out the pensions at a loss. They don't just go and sell the interest into the open market. According to Bloomberg, they bundle a bunch of them together and convert them into debt securities called collateralized fund obligations, CFOs. I've touched on that in a show about a month ago.
Don't forget to subscribe to the channel for me. Uh, and I'll leave a link in the description below to my monthly publication, the Risk Map, if you want to sign up. The July uh newsletter just dropped this morning uh with a full chart-heavy breakdown on why the level of optimism in the stock market right now is going to end badly if history means anything.
Also, uh, I was down in Newport Beach last weekend for a couple days. Met up with my friend Drew. We had a nice conversation about private credit and how what is going on really is equivalent to bank runs. I'll leave a link to the conversation which Drew posted on his channel. Uh, which his channel is called World Money Wins. Uh, I'll leave in the description below. Go uh show Drew some love. Uh, he covers a bunch of cool topics on his channel. He loves gold and silver and he loves those hand-poured bars. Uh, so go check it out.
So back to what's happening here with private equity. Do you see what's going on? Wall Street isn't solving its liquidity problem by selling these companies. It's solving the liquidity problem by inventing new financial products. Pension funds want out so badly that they're dumping their interest to secondary buyers uh like Ard and ARD. They're one of the biggest secondary buyer companies out there. They bundle hundreds of these interests together. Then Wall Street sells bonds backed by those fund interests to guess who? Insurance companies and other fixed income investors. Evercore now expects this CFO market alone to exceed $30 billion this year, growing 50% in just one year.
Okay, we've been covering net asset value loans, continuation funds, carried interest loans, uh, structured secondaries, and now we have collateralized fund obligations. They're all variations on the same financial engineering story. They're manufacturing liquidity because private equity isn't generating sufficient cash. Hey, but when the cash stops flowing, Wall Street doesn't stop. They just invent something new. And this secondary market is exploding. Jeffres expects $300 billion annually over the next couple of years supported by this continued liquidity needs and continuation vehicles. So what that means is they don't see this as a temporary workaround. It's becoming the private equity business model itself. Simply looking for ways to generate liquidity while sitting on thousands of unmarketable zombie companies.
And keep in mind uh these investors are some of the largest long-term investors in the world. Pension funds, endowments. Jeffrey's reports average private equity limited partnership portfolio pricing finished 2025 at 87% of reported net asset value. Okay. With buyout portfolios averaging about 92% of net asset value, older funds often trading at much steeper discounts. So what that means is they're taking at least 13% hits on these investments just to get out.
So suppose a pension fund owns a private equity fund. A manager um the manager says it's worth $100 million. Pension wants their cash out today. Nobody's willing to give them $100 million. Instead, like Ardian, will say, we'll give you $90 million or $80 million. Okay? So theoretically, they've traded value for immediate liquidity. Okay. have traded theoretical, not theoretic, they've traded theoretical mark-to-market, okay, internal value for liquidity immediately.
And that's only half the story. What some of them are then doing is they're borrowing against the interests. So this is where we have this so-called preferred equity deals coming in. Let's say you own the same $100 million fund. Instead of selling it, a credit fund says, "We'll give you $60 million today." Then future cash distributions from that fund go to the lender until they recover their loan plus their agreed return. Only after all that's paid does the original investor begin participating again. So Wall Street calls this preferred equity and the Financial Times article says who is actually reveals who's providing the preferred equity financing and you will probably won't be surprised who it is. BlackRock's, HPS, uh, Goldman Sachs, Carlyle.
So, let's take a step back. Instead of making money selling these companies, they're making money from financing companies that basically cannot be sold, are basically unmarketable. So, is this a sign of innovation and financial innovation or is this a sign of desperation? I will leave uh that rhetorical question for your comments and input below.
If you guys enjoy the content, please leave me a like on the video. Uh, if you're not subscribed to the channel, please subscribe to the channel for me and go check out the Risk Map newsletter link below. Check out my my interview I did uh with with Drew on World Money Wins link in the description below. Please weigh in. Leave me your thoughts and comments on this uh financial engineering nightmare we continue to see getting worse and worse. All right, with that being said, I will talk to all of you soon. Thanks. Bye.