Private equity secondary market

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In finance, the private equity secondary market (also often called private equity secondaries or secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast majority of private equity investments, there is no listed public market; however there is a robust and maturing secondary market available for sellers of private equity assets.

Driven by strong demand for private equity exposure, a significant amount of capital has been committed to dedicated secondary market funds from investors looking to increase and diversify their private equity exposure.

Contents

[edit] Secondary market participants

The market for secondary interests is still highly fragmented. Leading secondary investment firms (current dedicated secondary capital in excess of $2 billion) include: AlpInvest Partners, AXA Private Equity, Coller Capital, HarbourVest Partners, Lexington Partners, Pantheon Ventures and Partners Group.

Other major independent secondary firms (excluding banks, $1 - $2 billion of current dedicated capital) include Adams Street Partners, Landmark Partners, Newbury Partners, Paul Capital Partners and Pomona Capital.

Additionally major investment banking firms, including Credit Suisse, Deutsche Bank, Goldman Sachs, Lehman Brothers and Morgan Stanley have active secondary investment programs and other institutional investors typically have appetite for secondary interests.

Within the secondary arena, certain smaller specialized firms, including Cipio Partners, Industry Ventures, Lake Street Capital, Saints Capital, Vision Capital and W Capital, focus on purchasing portfolios of direct investments in operating companies (referred to as secondary directs. Other niches within the secondary market include purchases of interests in fund-of-funds and secondary funds (Montauk Triguard) and purchases of interests in real estate funds (Liquid Realty and Madison Harbor Capital).

While intermediation in the secondary market is still not as pervasive as in corporate mergers and acquisitions, leading advisors to secondary market sellers include investments banks (Credit Suisse and UBS), dedicated boutique firms (Cogent Partners and Fidequity), electronic exchanges (NYPPE), as well as established fund placement agents (Campbell Lutyens, Probitas Partners and Triago).

[edit] Types of Secondary Transactions

Secondary transactions can be generally split into two basic categories

Sale of Limited Partnership Interests - The most common secondary transaction, this category includes the sale of an investor's interest in a private equity fund or portfolio of interests in various funds through the transfer of the investor's limited partnership interest in the fund(s). Nearly all type of private equity funds (e.g., including buyout, growth equity, venture capital, mezzanine, distressed and real estate) can be sold in the secondary market. The transfer of the limited partnership interest typically will allow the investor to receive some liquidity for the funded investments as well as a release from any remaining unfunded obligations to the fund. In addition to traditional cash sales, sales of limited partnership interests are being consummated through a number of structured transactions:

  • Structured Joint Ventures – Includes a wide variety of negotiated transactions between the buyer and seller that typically is customized to the specific needs of the buyer and seller. Typically, the buyer and seller agree on an economic arrangement that is more complex than a simple transfer of 100% ownership of the limited partnership interest
  • Securitization – An investor contributes its limited partnership interests into a new vehicle (a collateralized fund obligation vehicle) which in turn issues notes and generates partial liquidity for the seller. Typically, the investor will also sell a portion of the equity in the leveraged vehicle. Also referred to as a collateralized fund obligation vehicle.
  • Stapled Transactions – Occurs when a private equity firm (the GP) is raising a new fund. A secondary buyer purchases an interest in an existing fund from a current investor and makes a new commitment to the new fund being raised by the GP.

Sale of Direct Interests – Secondary Directs or Synthetic secondaries, this category refers to the sale of portfolios of direct investments in operating companies, rather than limited partnership interests in investment funds. These portfolios historically have originated from either corporate development programs or large financial institutions. Typically this category can be subdivided as follows:

  • Secondary Direct – The sale of a captive portfolio of direct investments to a secondary buyer that will either manage the investments themselves or arrange for a new manager for the investments.
  • Synthetic Secondary / Spinout - Under a synthetic secondary transaction, secondary investors acquire an interest in a new limited partnership that is formed specifically to hold a portfolio of direct investments. Typically the manager of the new fund had historically managed the assets as a captive portfolio. The most notable example of this type of transaction is the spinout of MidOcean Partners from Deutsche Bank in 2003.
  • Tail-End – This category typically refers to the sale of the remaining assets in a private equity fund that is approaching, or has exceeded, its anticipated life. A tail-end transaction allows the manager of the fund to achieve liquidity for the fund's investors.


[edit] History

Main article: History of private equity and venture capital

The Venture Capital Fund of America (today VCFA Group), founded in 1982 by Dayton Carr, was likely the first investment firm [1] to begin purchasing private equity interests in existing venture capital, leveraged buyout and mezzanine funds, as well as direct secondary interests in private companies. Early pioneers in the secondary market include Jeremy Coller, the founder of UK-based Coller Capital, and Landmark Partners, based in Simsbury, CT.

2008:

2007:

  • Coller Capital completes $4.8 billion fundraising and Lexington Partners completes $3.8 billion fundraising for their newest funds, the largest and second largest funds raised to date in the secondary market[3] [4]
  • Ohio Bureau of Workers' Compensation reportedly agrees to sell a $400 million portfolio of private equity fund interests to Pomona Capital [5]
  • MetLife agrees to sell a $400 million portfolio of private equity fund interests to CSFB Strategic Partners[6]
  • Bank of America completes the spin-out of BA Venture Partners to form Scale Venture Partners, which was funded by an undisclosed consortium of secondary investors


2006:


2005:


2004:

  • Bank One sells a $1 billion portfolio of private equity fund interests to Landmark Partners
  • The State of Connecticut Retirement and Trust completes the sale of a portfolio of private equity funds interests to Coller Capital, representing one of the first secondary market sales by a US pension fund
  • Abbey National plc completes the sale of £748m ($1.33 billion) of LP interests in 41 private equity funds and 16 interests private European companies, to Coller Capital [15]
  • Swiss Life sold more than 40 fund and direct investments to Pantheon Ventures


2003:

  • HarbourVest acquires a $1.3 billion of private equity fund interests in over 50 funds from UBS AG through a joint venture transaction [16]
  • Deutsche Bank sells a $2 billion investment portfolio to a consortium of secondary investors that would become MidOcean Partners


2001:


2000:


1998:


1995:

  • Secondary volume estimated to exceed $1 billion for first time


1994:


1992:

  • Landmark Partners acquires $157 million of LBO fund interests from Westinghouse Credit Corporation


1991:

  • Paul Capital Partners founded and acquires $85 million venture portfolio from Hillman Ventures


1989:


1982:

  • Venture Capital Fund of America founded by Dayton Carr

[edit] External links

[edit] See also

[edit] References

  1. ^ Contrarian : Second Helping (Dealmaker, 2007)
  2. ^ CalPERS and where private equity funds go to die (WSJ.com, 2007)
  3. ^ Coller International Partners V closes at $4.5 billion dollars'
  4. ^ Lexington Capital Partners VI
  5. ^ OBWC Portfolio Sale Nears End
  6. ^ Secondaries join the mainstream
  7. ^ Dow Jones Financial News: Goldman picks up Mellon portfolio
  8. ^ American Capital Raises $1 Billion Equity Fund; Expands Its Asset Management Business
  9. ^ American Capital raises $1bn fund
  10. ^ ACS spins off stakes into $1B fund (TheDeal.com)
  11. ^ Singapore’s Temasek Hits Hard Going (Asia Sentinel, 2007)
  12. ^ AlpInvest and Lexington Partners buy $1.2bn secondary portfolio from DPL
  13. ^ M&A legal guru urges more diligence]
  14. ^ DPL to sell PE stakes for $850M (TheDeal.com)
  15. ^ Press Release: Abbey sells private equity portfolio to Coller Capital
  16. ^ HarbourVest transactions
  17. ^ Press Release: The Royal Bank of Scotland: asset sale


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