Friday Letter: Sign of the times

A rare takeover of one listed fund of funds by another sheds light on the state of the secondaries market as private equity heads into troubled waters.  

Earlier this week Bear Stearns Private Equity, the US bank’s London-listed fund of funds, signed a deal to acquire Macquarie Private Capital Group, a Sydney-listed rival.

As a secondary transaction it was small beer with just A$115 million ($105 million) changing hands in the all cash delisting. But as a public tender offer, it warrants a close look for the insight it provides outsiders on the state of the all too opaque private equity secondaries market.

The Macquarie vehicle floated in 2005 as a fund of funds offering retail investors access private equity investments, but it has been one of the least successful listed funds created by Macquarie.

After listing at A$1, the securities have consistently traded below their issue price and net asset value, a trend worsened by the fluctuating equity and credit markets last year. Also, it lacked the scale to compete for spots in bigger funds and deals.

Ironically, although this appeared to hamper the fund’s attractiveness to retail investors, it has made it a tasty morsel for Bear Stearns Private Equity, which is focusing on the lower mid-market.

So what does the Australian fund’s fate reveal about the secondary market at large?

First, it is a measure of the market’s maturity that the deal has happened. In Macquarie’s mixed bag are 44 funds with 300 underlying portfolio companies of which almost two thirds are in Asia. One adviser to the secondaries market said the deal underlined the increasingly impressive reach of the market.

The transaction is also a good complement for Bear Stearns’ current portfolio and in line with its goals of increasing its exposure to the lower mid-market in regions that stand a better chance of weathering a global downturn. Providing that strategy holds water, no mean bet in itself, then Bear Stearns believes the portfolio will start delivering exits in an acceptable time frame, around two years, for its shareholders, justifying the bid of A$1.062 per share.

Which brings us to the second point of interest. The price is a four percent discount to the Macquarie fund’s net asset value to the end of January and a whopping 56 percent premium to its last closing price. It allows Macquarie to get out of its almost 50 percent stake in the fund with its dignity intact, a key driver for sellers looking to tidy their exposure to private equity.

Secondary fund investors have rarely been busier thanks to a combination of strategic sellers and those with a need for liquidity, according to Brenlen Jinkins at Cogent Partners, the secondaries adviser. Macquarie clearly falls into the former camp of those who ramped up their exposure to the asset class and are now taking a cold look at what they own.  Retail investors in the fund may have fallen into the latter category.

That Bear Stearns is on hand to offer a solution acceptable to both Macquarie and its investors in its niche portfolio is a measure of how far the secondaries market has come.