Those demonic denominators; Big SEC relief; Could your bank just walk away?

PE braces for the old denominator effect; SEC gives audited financials deadline relief; Another side of the sub lines question.

Allocation whipsaw: In sister title Private Equity International’s last LP Perspectives survey, 44 percent of respondents said they were at their target PE allocation. Well, that’s obviously going to change.

One lender, and an investor in his own right, tells me, “the denominator effect will come to play again. There’s no doubt.” In the same way some bond investors are going to be forced sellers when holdings get downgraded to below investment grade, some limited partners are of course going to be structured to sell when lower valuations cause them to be overweight alternative asset holdings. For example, in Europe, UCITS funds can only have 10 percent illiquid securities – so you can expect a forced sell-off from many of those funds.

And, as PEI’s Isobel Markham writes, some institutions, like pensions, may need to sell in order to fund themselves, should they take material hits. A senior executive at a North American public institution tells her:  “People will be offloading their public equity and credit holdings first to satisfy their cash liabilities, but when forced against a wall, we’re likely to see a lot of non-economically driven LP stake sales at material discounts to NAV as we did in the last crisis.”

SEC updates: Here comes some welcome relief for funds who may not be able to deliver audited financials in time. From the Securities Exchange Commission, you may be able to file your audited financials after the April 29 deadline:

“The Division would not recommend enforcement action for a violation of rule 206(4)-2 against an advisor that is relying on rule 206(4)-2(b)(4) and that reasonably believed that the pool’s audited financial statements would be distributed within the 120-day deadline, but failed to have them distributed in time under certain unforeseeable circumstances. (Modified March 5, 2010.)”

Compliance consultant Todd Cipperman has this advice: “Private fund managers should deliver financials on time if possible. If not, we recommend documenting (eg written notice from the auditor) that it could not deliver the financial statements. We also recommend notifying clients either directly or through website disclosure.”

And sister title Regulatory Compliance Watch brings us some updates on the impact of all this on the SEC’s enforcement, exam and rule-making priorities.

Sub lines: We talked a little about this a couple of days ago – when we published Alex Lynn’s story on LPs potentially facing liquidity shortages. Another side of the question is: what about the banks? If you’re using an uncommitted capital call facility, your bank can just close the teller window on you at any time. And in fact sub-line scholar Alex Lynn already pointed this out, in February:

“The notional value of debt facilities provided on an uncommitted basis is estimated to have grown 12 to 15 times over the past decade, Zac Barnett, managing partner at debt advisory Fund Finance Partners, told Private Equity International. These facilities mean the lender has agreed to provide capital at set terms when asked but is under no obligation to do so.”

These lines are capital-light – great for banks. But they pulled back from capital call lines in the last crisis. And if they think your LPs are facing a liquidity shortage and you might be short on cash – why wouldn’t they do it again? (I am also genuinely asking here, please do edify me – on background is fine! – if I’m missing something).

Email prepared by Graham Bippart