The private equity secondaries market is sometimes likened to used car sales – brokers trying to peddle second-hand merchandise for the highest price possible.
However, perhaps a more accurate description of how the market works would involve an analogy with the courting of a romantic love interest.
Philip Tsai, a managing director in UBS’ private equity secondary advisory unit, gave a very apt description at Harvard Business School’s Venture Capital and Private Equity Conference in February. Tsai was explaining why the secondaries market was good not only for limited partners looking for an exit, but also for GPs, as a way of meeting new investors.
“That’s how we sell it to GPs. Why do you want to keep an upset, reluctant LP who you know is not going to be in your next fund anyway?” Tsai told the audience at Harvard. “Try to find a replacement limited partner who clearly wants to know you better, clearly likes your portfolio and your price, and may invest in your next fund.” Words to live by – whether offloading stakes in zombie funds, or trying to find a mate.
Tsai’s description was part of a conference panel that discussed the de-stigmatising of the secondary market. Years ago, no one wanted to acknowledge that a secondary transaction was taking place – not the buyer, and not the seller.
But today, the negativity surrounding secondary sales has largely dissipated; for GPs in particular, the strategy should be a way of broadening the investor base.
Secondaries also give LPs confidence that if they need to get out of a fund for some reason, there is a path to exit, panellists said. And it also keeps open the possibility that investors who were not able to get into a fund originally may still have a chance to get some exposure.
Some firms even put together lists of interested buyers in their funds, which they hand out to LPs in the event those investors ever want to exit their commitment, according to John Toomey, a managing director with HarbourVest Partners who focuses on secondary transactions.
This more positive view of the market is apparent from the glut of transactional activity that has taken place lately. Last year, deal volume broke records on the secondary market, coming in around $25 billion; this year, total volume could break $30 billion. That’s a whole lot of love.