September 2009
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Secondaries set to take off, according to survey

Whilst it appears that the market downturn has caused Institutional Investors (Limited Partners) to abandon investing in new private equity funds, many investors have eagerly flocked to the secondary private equity market with the intention of purchasing secondary interests at substantial discounts from the expected flood of distressed investors. This strategy has seen little success to date as the bid-to-offer spread has been too wide for many secondary transactions to complete, with the anticipated deluge of distressed sellers looking to sell interests at any price not quite materialising.

However, according to the latest extensive survey on the secondary private equity market undertaken by Almeida Capital, a specialist fundraising advisory firm, it appears that investor interest in the secondary market remains unabated. Investors still believe the market will take off and they are allocating considerable resources and capital in preparation.

Key findings of the survey include:                                          

  1. Large number of prospective new buyers are entering the secondary market:

                Three quarters of all LPs are looking to buy secondaries in the next 12 months

                55% of LPs have already bought a secondary interest and an additional 23% are planning to buy secondary stakes

                Investor interest had been forged on the perception that opportunities would arise to buy secondary holdings in funds due to floods of distressed sellers being forced to offload investments.  This interest has encouraged a wave of new prospective secondary investors from the ranks of experienced primary LPs

                Superficially it appears as if sellers of secondary interests can now approach a much larger pool of potentially interested buyers in addition to the well known ‘traditional’ secondary players

  1. However, few deals have been completed as many new buyers are bargain hunters and most distressed sellers have already sold their holdings

                The secondaries market has been surprisingly quiet over the last year. Whilst large numbers of funds have apparently been offered for sale, the bid-to-offer spread has generally appeared to be too wide for deals to close

                Many of the buyers that have entered the market over the last year are bargain-basement hunters who are offering prices that are far too low for sellers to accept.

                The main motives for sellers are the same as they were a couple of years ago: the poor performance of funds (54%) and the reallocation of cash to better performing funds (50%)

                The perception that many LPs need to release cash urgently appears to be incorrect: the short or medium term need for cash is a motive for 26% of sellers today compared to 23% of sellers two years ago.  It thus appears that distressed sellers have already exited the market while current prospective sellers are not yet distressed enough to offload assets at current average prices

  1. LPs are prepared to pay wildly different prices and sellers can get substantially higher prices if they find the right buyers

                The perception that all LPs are offering much the same price is incorrect.  Pricing spreads for funds raised in 2005 to 2007 vary from a premium of 10% to discounts in excess of 70%

                Although most large portfolios are not being sold successfully, some smaller transactions (below €100m) are occurring at the edges of the market as shrewd long-term investors target specific funds and offer substantially higher prices than the market average

                The contrast in prices offered by long-term investors compared to bargain hunters is well illustrated by the interest in secondary transactions for small buyout funds raised in 2005 for which nearly a third of LPs expect a discount greater than 40%, yet nearly a quarter of LPs are prepared to pay a price discounted less than 20% from NAV

                The wide range of prices available in the market is also apparent for the less popular mega funds where, for the 2005 vintage buyout funds, 48% of LPs expect a discount greater than 40% whilst 16% of LPs would accept a discount of less than 20% from NAV

                The data clearly shows that if sellers identify the right buyers for their funds they can get substantially higher prices

  1. Market participants believe that Q4 2009 will be the best time to buy secondaries and Q2 2010 the best time sell

                Nearly half of LPs expect Q2 2010 to be the best time to sell, whilst only 3% think it will be the best time to buy

                Nearly a third of prospective buyers believe Q4 2009 to be the best time to buy, whilst only 6% believe it will be the best time to sell

                Nearly a quarter of LPs believe the best time to sell was in Q4 2008 and prices will continue to deteriorate for some time

The results underline what we are seeing in the market place” said Richard Sachar, Managing Director of Almeida Capital, “we have seen and advised on numerous relatively small deals involving high calibre funds being sold to well-regarded LPs at sensible prices.  Discerning secondary investors are prepared to pay realistic prices for the funds they want and to build or enhance their relationships with top quality managers. But they shy away from deals where they are pressured to bid for low grade funds at the same time as part of a portfolio sale.”

Contacts for further information: Farah Shariff, Almeida Capital. Tel +44 20 7845 7580

The following definitions were used for this survey:

Small buyout funds are below $500m in size; medium buyout funds are $500m to $5bn in size; large buyout funds are above $5bn. The words “secondary” and “secondaries” are used interchangeably throughout this report according to context and are used to refer to the exchange of interests in one or more private equity fund(s).

About the Survey

This survey was undertaken by Almeida Capital in association with AltAssets in June, July and August 2009 through direct interviews and via questionnaires. Information was provided, and will remain, in strictest confidence. The report uses only aggregated information.  The objective of this survey was to gain an in-depth understanding of the level of interest amongst Limited Partners for buying and selling secondary interests in private equity funds. The results provide an opportunity to assess how market conditions have impacted the secondary market.  Over 250 institutional investors from around the world participated, including pension funds, insurance companies, asset management firms, endowments, funds of funds and family offices. The findings offer insights on market participants, deal activity, pricing and prospective developments.

About Almeida Capital

Almeida Capital is a specialist fundraising advisor. The firm provides fund placement, advisory and secondary transaction services to the global private equity industry. The firm helps General Partners build and develop their private equity firms and raise funds from institutional investors and family offices. Almeida also advises buyers and sellers on the valuation, sale and restructuring of interests in private equity funds.

Farah Shariff
Almeida Capital
advisory secondariesBurleigh House, 357 Strand, London, WC2R 0HS,

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