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Investors are selling stakes in private equity and venture capital funds this year at the fastest pace on record, as the downturn in equities spreads to the private markets that boomed during the era of low interest rates.

Pension and sovereign wealth funds were among those that sold $33bn worth of stakes in private funds in the first six months of the year, up from $19bn in the same period in 2021, according to Jefferies, typically selling them below their face value.

The sell-off follows a decade of surging allocations to private markets, which have grown in influence since the financial crisis and cover everything from buyout firms to venture capital and real estate funds.

It casts doubts on the ability of these groups to sustain the fundraising that has transformed them into a major force in global dealmaking.

Pension funds say the move to ditch stakes has been partly triggered by the steep decline in stock markets, leaving their overall portfolios too exposed to buyout funds and other private investments whose value has not been marked down in the same way.

“We’ve never had to do this before, and we hoped we would never have to do it,” said the head of private equity at a pension fund that sold some of its holdings in buyout funds at a discount. “We’re also going to reduce the amounts we commit to new private equity funds this year and next.”

At the same time, pension funds that had committed money to buyout firms have had to actually stump up the cash far more quickly than expected over the past two years because of the frenzy of dealmaking.

That has sparked fears of a funding squeeze, according to a senior executive at an endowment that invests in private equity, as some pension funds worry they may not have enough cash on hand to meet future capital calls from the buyout funds they have committed to.

Investors “are desperately worried that they’ll get themselves into a complete cash crunch and have to start selling things, so they’re trying to get on top of that” by selling the stakes now, he said.

“Distributions [money handed back to investors from successful deals] were at an incredible pace for the last five years” and investors assumed this would continue, enabling them to meet new calls on their funds, he said. “Instead they’ve almost completely turned off.”

In contrast to publicly traded securities that can be easily bought and sold, investments in private funds are typically locked up for about a decade and their value is determined using a process of sophisticated guesswork.

However, the holders of these illiquid stakes can quietly sell them in a secondary market, either to other pension funds and sovereign wealth funds or to specialist groups known as “secondaries” businesses. These niche investment groups are sitting on about $227bn, raised partly for such transactions, according to Jefferies.

While some investors routinely sell their older stakes in private funds, almost half of this year’s transactions involved a first-time seller, Jefferies estimates. The volume of such sales is always higher in the second half, putting this year on track for a record if the pattern is repeated.

On average, stakes in buyout, venture capital and real estate funds were disposed of for just 86 per cent of their face value in the first half, the biggest discount since the period of market turmoil at the start of the coronavirus pandemic, according to Jefferies.

Stakes in venture capital funds were sold at 71 per cent of their most recent valuation, underlining how rising interest rates and fears of a recession have curbed investors’ willingness to back often unprofitable start-ups.

Private equity groups typically estimate that an investor makes more money if they hold the stake until the end of a fund’s life. But the seller does not necessarily lose money overall because the fund may already have repaid enough from successful deals to earn a positive return.

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