Development of a derivatives market for private equity is imminent with the planned launch next month of the London Private Equity Futures and Options Exchange (PEFOX).
Hailing a “synthetic revolution” in private equity, PEFOX has “created proprietary, standardised futures contracts covering all major private equity funds”, according to Kishore Kansal, managing partner. PEFOX's members will be able to take long or short positions, independent of the fund manager, he added in a statement seen by PEO and expected to be released widely next week.
For the first time, secondary funds, fund of funds and other institutional investors will be able to utilise derivatives to reduce volatility and rebalance risk in their portfolios.
Kansal, whose background includes several years each at secondaries broker and placement agent Campbell Lutyens and emerging markets private equity firm Actis, noted that transfers of economic interest taking place in the secondaries market are essentially derivatives. “The economic interest in a fund is transferred to a buyer but the seller retains nominal legal ownership. This was a derivative structure in all but name and, by definition, went beyond the technical boundary of what could have been achieved through a secondary sale.”
PEFOX will allow investors to access elite funds or hedge exposure to partnerships and portfolios, said Ray Maxwell, chairman of PEFOX and former managing director of INVESCO Private Capital.
Andre Jaeggi, a member of PEFOX's advisory board and former partner of fund of funds Adveq, added: “For the first time, secondary funds, fund of funds and other institutional investors will be able to utilise derivatives to reduce volatility and rebalance risk in their portfolios.”
Kansal's statement acknowledged that similar initiatives had failed to take hold over the last decade due to the need for an independent broker buffering buyer and seller and because of a “fundamental lack of liquidity”. He said current market conditions, characterised by more volatility and an increased desire for liquidity, have likely changed the market's appetite for such an exchange.
Kansal declined to provide more detail to PEO, noting PEFOX would release more information upon its launch next month.