Secondaries start 2012 at a sprint

New York City is selling up to $750 million-worth of private equity stakes on the secondary market, the first phase in what could be a $2 billion unloading for the huge pension system.

Meanwhile the Government of Singapore Investment Corporation, the $300 billion sovereign wealth fund, has hired UBS to run a sale of up to $750 million of private equity and venture capital interests on the market – the first time the institution has ever entered into an intermediated process.

These are just two of the flood of offerings that are expected to hit the private equity secondary market this year. Industry sources expect the market to be just as busy as last year, which broke records with deal volume of an estimated $27 billion, according to secondary intermediary NYPPEX.

That said, predictions of secondary transaction volume hitting the $30 billion level last year failed to materialize, as many sellers retracted offerings amid the public market volatility caused by the ongoing sovereign debt crisis in Europe. As the stock markets wobbled,  the “uncertainties of August” caused many sellers to step back and take a hard look at their portfolios, according to Jason Gull, global head of secondary investments at Adams Street Partners.

“It’s a concerning time in the market. There’s a high level of uncertainty; a lot of buyers and sellers have been taking stock, trying to figure out what is going on,” Gull says. “They’re trying to figure out: ‘what does all this confusing, volatile information about the macro economy [mean] for my portfolio?’”

However, secondary professionals are predicting that deal flow in the first half of 2012 will echo the robust activity that defined the market in early 2011, as sellers come back to the market.

“It’s not just pensions; it’s pensions, banks, endowments… Many of them are in the market and many of them are coming,” said one secondary market source.

Public pensions in the US have spent the last year at least analysing their portfolios and cutting down on the number of their manager relationships, sticking only with their favourites and freeing up space for new commitments. That process will continue this year.

New York City is one example: the system’s chief investment officer Larry Schloss told Private Equity International that the system would commit more money to fewer managers. New Jersey’s state pension system has also been selling up to $1 billion of its private equity portfolio, while the California Public Employees’ Retirement System sold at least $1 billion of private equity interests last year.

Financial institutions drove a lot of the deal flow last year, with several banks selling massive chunks of their holdings. One of the largest deals of the year was AXA Private Equity’s acquisition of a $1.7 billion private equity portfolio from Citigroup.

This year already, Lloyds Banking Group has agreed to sell its private equity business to Coller Capital, collecting £332 million for the transference of 40 investments into a new joint venture, in which Lloyds will retain a 30 percent stake.

And the market is flush with capital. Several firms have large pools of capital, includingLexington Partners, which closed the largest-ever secondary fund on $7 billion last year. Coller Capital has been targeting $5 billion for its sixth fund, while other firms like Greenpark and Unigestion closed or are raising new vehicles.

By the end of the first half last year, about $14 billion-worth of deal volume had transacted on the secondary market, the highest-ever half-year deal volume, according to Cogent. This year, the market could compete with that record-breaking tally – as long as the public markets don’t tank altogether.