Second Thoughts: A commercial success

Adam Le 180

Adam Le

Wilbur Ross became the first private equity professional to join the Trump cabinet when he was confirmed as Secretary of Commerce in early March. He is expected to sell a portfolio of stakes by 28 May at the latest to avoid a potential conflict of interest.

Secretary of Education pick Betsy DeVos was in a similar position. She had to sell at least $180 million in private fund stakes. A businesswoman and daughter-in-law of one of Amway's co-founders, DeVos had less than 90 days to divest her interests in various vehicles including secondaries funds managed by Partners Group, PineBridge Investments and Coller Capital. She also held private equity, real estate, private debt and collateralised loan obligation vehicles. 

So how big is the high-net-worth and family office market and is it a source of dealflow secondaries participants should pay more attention to?

Firstly, it's important to note that wealthy individuals and family offices are sometimes grouped together as a seller type, as many private individuals hire professional teams to manage their money, or outsource investments to multi-family offices. Both seller types are notoriously private, so data on how much they contribute is “anecdotal at best”, one advisory source told me.

That said, here are a few estimates: Nico Taverna, head of secondaries at Zurich-headquartered Adveq, tells me as much as 25 percent of his firm's secondaries dealflow comes from high-net-worth investors and family offices, while Greenhill Cogent puts individuals in its “other” category of seller types, which accounted for 12 percent of sellers by fund count last year.

While not on the radar of the large buyers, it's a promising market for niche firms, though there are unique challenges to deal sourcing and closing.

One such hurdle is that high-net-worth individuals and family offices often invest in private equity through feeder funds held by private banks. When a client wants to sell a stake in these vehicles, the process the seller, intermediary and buyer must all go through is nothing short of a “massive headache”, Sunaina Sinha, managing partner of Cebile Capital, says.

On top of that, the bank may simply offer a client's interest to other internal clients, negating the wider market and flying under the radar of intermediaries' deal volume reports.

But buyers willing to put up with a few headaches are looking at a potential goldmine. The head of one multi-family office tells me many clients don't even know the secondaries market exists.

“Families are not necessarily very aware that they can sell things and don't necessarily have very realistic expectations of what is involved to sell something,” the source says. “They're not really aware of what a sale involves, or the fact that it's even possible.”

Some market participants are out to change this. In March, NASDAQ launched an online exchange for trading private equity fund interests and will focus first on feeder funds, which are vehicles typically used by high-net-worth-individuals to invest in the asset class.

Ultimately, while dealflow from high-net-worths and family offices may be sporadic and small in nature, it is a largely untapped source of potential deals. And in an environment of falling deal volume, buyers and intermediaries will do well to look under every rock.