Alternative routes

A handful of investment banks and specialist advisors spring to mind when someone mentions secondary sales. But in the past 18 months, several new groups have set up shop to trade illiquid assets.

Two – SecondMarket and Tullett Prebon – are bringing what some might call a “trading room mentality” to the sale of LP interests, offering basic brokering services for a smaller fee than traditional intermediaries, payable only once a transaction closes. They also argue they are bringing transparency, liquidity and efficiency to what has historically been an opaque market.

We let the market decide where the price is

Neil Campbell

Headquartered in London, Tullett is a global inter-dealer broker.

“We’re not an investment advisor, we’re not an investment bank, we don’t offer investment advice,” says Neil Campbell, head of Tullett’s alternatives desk, which trades mostly single interest stakes in hedge and private equity funds. “We let the market decide where the price is.”

Tullett’s alternatives brokers don’t do any valuation work, and unlike some traditional intermediaries, refuse to give bidders exclusivity. “We want to show the price [to numerous potential buyers] to get the best market price, not just one or two people,” Campbell explains, noting Tullett has recently added telephone brokers in New York and Singapore to complement the London-based alternatives-focused team.

Asked if GPs might be unhappy about the distribution of confidential information, Campbell says Tullett doesn’t share any details on the underlying funds. And pricing information isn’t made public, he adds. “We’d never put it on a screen. It’s confidential to clients of Tullett’s, as with all our markets,” Campbell says. He adds that, ethically, Tullett feels it cannot reveal counterparty names until a price is agreed, a practice which can sometimes result in a deal being scuppered when parties are identified.

The head of SecondMarket’s alternative trading platform, Jeffrey Bollerman, says his team tries to discern early on who might be on a general partner’s “no” list so it doesn’t end up “spinning its wheels” and brokering a transaction between parties that would ultimately get vetoed by the GP.

Based in New York, SecondMarket operates electronic secondary trading platforms for various asset classes and securities. Last year it added a division to trade limited partner interests in private equity, venture capital funds, hedge funds and funds of funds. The division also relies heavily on human capital to match buyers and sellers.

“Traditionally [the private equity] asset class has been intermediated by people with a lot of investment banking DNA so they are engaged, do bottoms-up due diligence, research reports, they do a book and the transaction looks very much like an M&A deal,” explains Bollerman. ”We don’t do that.”

The more realistic participants we have, the more likely a deal gets done

Jeffrey Bollerman

Like Tullett, SecondMarket does not provide analysis on the underlying assets, but it will provide “market colour” as to where similar interests have traded, says Bollerman. “We share that happily with our buyers and sellers. The more realistic participants we have, the more likely a deal gets done.”

While sellers may dispose of a portfolio via SecondMarket, the firm breaks it up into single interests to accommodate buyers’ natural tendency to cherry pick. Its model is particularly attractive to high net worth individuals who, Bollerman says, find it “doesn’t pay to engage an investment bank and pay a retainer, both because it doesn’t make sense on the economics for the seller and there aren’t a lot of intermediaries looking to take on such a modest mandate”.

Veteran secondary market participants have greeted the entrance of SecondMarket and Tullett rather coolly; four interviewed for this article, all of whom wished to remain anonymous, noted that similar exchanges have been around for years without significantly impacting the bread and butter of secondaries funds and intermediaries: complex, multi-fund or multi-asset deals.

“There’s a place in the market for them, but probably predominantly for single pieces of a fund interest being sold by high net worth individuals,” agrees Tim Jones, deputy chief investment officer for Coller Capital. “Some of the GPs are actually trying to do their own managed brokering now; that’s probably more likely where a lot of the single pieces will be traded, they’ll be GP-directed with internal matching services.”