Catch-22

Buyers of secondary fund interests are worried about pricing drops, while sellers are concerned MAC clauses could cause deals to fall through, writes Christopher Witkowsky.

The secondaries market has exploded as financial turmoil roils the globe, but its participants are characterised by some palpable, and perhaps inevitable, angst.

Some buyers are eyeing with caution large deals from institutional investors like the $37 billion Harvard endowment, which is moving quickly to get a bundle of interests sold before further pricing drops or a flood of limited partners hit the secondary market with fund interests. Harvard’s secondary sale will drive down prices as it will take $1.5 billion of demand out of the market at a time when supply is not rising, a source told PEO.

Chris Witkowsky

Meanwhile, sellers also are beginning to worry that buyers are going to attach protective clause to the deals allowing them to cancel transactions if pricing drops, like fund of funds HarbourVest Partners recently did. HarbourVest backed out of a signed secondaries deal in October by invoking a material adverse change clause.

Todd Miller, a managing director with Cogent Partners, a Dallas-based secondaries market advisor, said buyers have begun selectively asking for MAC clauses to be part of secondaries deals. Cogent has resisted binding deals with MAC clauses, but some buyers have insisted. 

The secondary market is expected to continute to heat up as limited partners look for liquidity, and this tension between buyers and sellers is likely to do so as well. 

As seen with other niche segments in the private equity asset class, the friction marks a maturation of a marketplace characterised by participants with diverse motivations. Those growing pains will persist as private equity LPs and GPs cope with caretaking their portfolios amid the global financial crisis.