Still hungry

Limited partner appetite for secondaries investments soared in 2009 with one reason being the proliferation of low-priced, one-off fund interests coming to market. Picking up these interests allowed limited partners gain exposure to desired vintages and managers on a targeted basis.

These one-off opportunities have somewhat dried up this year, sources tell PEI, as prices for assets have risen to or near to par, and the more traditional secondaries players, like the large specialist secondaries managers, are once again ramping up activity in the market after keeping quiet last year.

Last year may have been the height of the one-off deal

Jean-Marc Cuvilly

“Last year may have been the height of the one-off deal,” Jean-Marc Cuvilly, a partner with placement agent and secondaries advisor Triago, tells PEI. “Given where pricing is right now, some non-traditional buyers could be getting a little cautious.”

Some deals that did get done during last year’s window of opportunity included the Massachusetts Pension Reserves Investment Management Board buying a $150 million LP interest in Denham Capital Management Commodity Partners V from the Harvard Management Company. The Indiana Public Employees’ Retirement Fund picked up $10.8 million worth of LP stakes in oil and gas-focused private equity firm EnCap Investments.

These “non-traditional” buyers are starting to withdraw from the market, says Cuvilly: “Purchasing secondaries may not be their main business, after all. And if there is too much competition for deals, they will start to say, ‘we can’t play in this market any more’,” he adds.

With greater competition, comes higher prices. According to recent data from secondaries broker Cogent Partners, the average high bid for secondaries stakes in the first half of 2010 was up 17.5 percentage points from the second half of 2009. The average high bid in H2 2010 stood at 79.6 percent of net asset value, an increase from the high bid average of 72 percent of NAV in H2 2009.

There was extreme interest in 2009. It’s not as extreme now but investors are still looking at it.

Priya Pradham

Bids have risen due in part to the return to market of the more traditional secondaries investors, Cogent said. Another driver of high bids is the opening of the exit market, and an “increase in general partners’ visibility into potential exit timing and portfolio company values, which has been buoyed by numerous announcements of IPO filings and trade sales of sponsor-backed companies during the first half of 2010”, Cogent said.

“This year, the interest hasn’t gone away, but there is an awareness of the amount of capital that’s been raised and is available to invest in secondaries and the fact that deals could be competitive,” says Priya Pradhan, research consultant with consultant Cambridge Associates. There’s also recognition that it takes a particular “skill set” to price assets on the secondaries market, Pradhan adds.

While the number of institutions looking to take advantage of one-off opportunities may be in decline, the appetite to access for the market niche via specialist managers seems to remain strong.

“I don’t think interest has dried up,” says Pradhan. “There was extreme interest in 2009. It’s not as extreme now but investors are still looking at it. In thinking of an opportunistic investment, secondaries is still one of the options to consider.”

Several institutional investors, such as the $63 billion New Jersey Division of Investment and the $30 billion Tennessee Consolidated Retirement System, recently announced plans to seek out secondaries investments. The UK’s Pension Protection Fund, which serves as a safety net for pension scheme members of companies that go out of business, recruited Goldman Sachs, Hamilton Lane, Lexington Partners, LGT Capital, Partners Group, Pantheon Ventures and RREEF earlier this year to run a secondaries programme.

Committing to a specialist manager, however, does not guarantee success, warns Anna Dayn, head of private equity at pension consultant Cardano. “The secondary business is not without risks. Having a macro perspective and a sense of market timing is incredibly important,” she says.

“Many secondary managers got their timing all wrong and are stuck with funds in which  a large part of the investments were made at a premium during the boom years,” she continues. “It is clear that the best stewards of investor capital in the secondary market were conservative in deploying capital at the high-priced environment of 2006 – early 2008.”