Secondaries, first-hand

Michael Granoff
Chief executive, Pomona Capital New York

“People are not anxious to buy at what they thought was a discount and wake up and find out the portfolio got written down. People didn't have a good idea of what the reality was. That has cleared up now that the numbers are out.”

“The margin of safety is smaller and the price of getting it wrong is higher … today the price of getting it wrong is real pain.”

Excerpted from an interview on PrivateEquityOnline

Jason Gull
Partner, Adams Street Partners Chicago

“The misperceptions about the state of the US endowment and foundation market go to two extremes. On one end you have, ‘There's no issue, it's been resolved, everything's fine.’ On the other end of the equation, you have, ‘They are absolutely desperate and doing whatever they can to scavenge for cash.’ The reality, based on my many visits criss-crossing the US, is somewhere in the middle.”

“Most institutions are less concerned with the denominator effect. They know that it's artificial because the numerator needs to play out a bit longer. Valuations in the public market adjust quickly. The bigger issue has been cash for programme needs. When you were operating at a five percent spend and your portfolio falls 40 percent in value, you are now spending at an 8 percent to 9 percent rate. That is going to eat into the corpus of the portfolio quickly, especially in a low or negative return environment. Putting further pressure on the cash needs of the portfolio are the commitments to private equity, real estate, distressed, and real asset funds, which have been growing in size over the past few years as the portfolio has been enjoying spectacular returns and growth. It's a double impact. When the rug gets pulled out from under you, your operating structure doesn't change, and your commitments are fixed. My bet is that capital calls will surge long before portfolios recover their value. I don't think cash pressures will abate anytime soon.”

Interview with Private Equity International

Jeffrey Hammer
Managing director, Co-Head of Secondary Advisory Group, Houlihan Lokey, New York

“The secondary market is in a lull. Buyers and sellers of traditional LP interests haven't been able to agree on pricing. Increasing return targets and decreasing risk tolerance has dramatically lowered pricing since the buyer community has altered its underwriting criteria over the past year, demonstrating a distinctly negative view of sponsor portfolios.

Sellers, however, proved to be far less desperate than previously thought to be the case in late 2008. They haven't flooded the market with assets and have patiently waited for pricing to correct. While some sellers were forced to liquidate holdings at distressed prices, other potential sellers have found alternative means of raising capital. The slowing pace of capital calls has undoubtedly helped some investors avoid the secondary market for now, but this dynamic will change quickly when sponsor deal activity rises.

Despite the logjam in the traditional secondary market, liquidity can still be found on reasonable terms. We have had some success in taking transactions to strategic and special situation buyers through the firm's global coverage effort. We expect to execute more such transactions in the short term as the secondary market continues to gain traction with new types of investors worldwide.”

Interview with Private Equity International