Clifford Chance
Liquidity and Alternatives: Exiting alternative positions for LPs
May 27, 2020
The COVID-19 pandemic initially wiped significant value from public markets across the world (in some cases, resulting in double digit losses). While the public markets have somewhat bounced back since the initial COVID-19 downturn, some investors are still seeing their portfolios become disproportionately skewed or weighted towards alternatives which have not been revalued (commonly referred to as “the denominator effect”). A natural impact of the current environment is that funds may need to re-examine and adjust some of their investment weightings and allocations during the course of this year with a view of liquidating some alternative positions to preserve their pre-COVID-19 levels and bolster their cash reserves. In addition to the denominator effect, some limited partners (“LPs”) are also being hit by a need for ongoing working capital as traditional sources of income and revenue begin to dry up.
In many cases, investments in alternatives are made via private funds managed by North American and European fund managers. These funds are structured with very minimal (if any) withdrawal, redemption and transferability rights for LPs. Additionally, marketing and attracting interest in these LP investments can be difficult due to the private nature of fund investments and the availability of the information required to value the underlying portfolio of investment interests which is managed and determined by the fund managers themselves.
This briefing aims to provide some practical suggestions as to the ways in which LPs might realize divestment opportunities and/or secure alternative financing arrangements, to create liquidity or bridge funding issues.
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