Second best

Raising a fund is tough. It could get tougher in 2009 if LPs start to favour secondaries from recent vintages, writes Toby Mitchenall

GPs could be forgiven for thinking that fundraising could not get any tougher. LPs are grappling with all sorts of constraints – the denominator effect, lack of liquidity, over-allocation strategies gone wrong – which mean that only the most prestigious managers are attracting commitments with ease.

Competition from an unexpected source could make it even harder in 2009.

The secondaries market is ramping up; secondaries adviser Campbell Lutyens estimates in excess of $35 billion has been recently raised or about to be raised to buy secondary fund interests.

Toby Mitchenall

As LPs keen to unburden themselves of some heavy uncalled commitments flood the market with supply, there are a lot of only partially called ‘07 and ‘08 vintage fund interests for sale.

“We have seen a huge increase in deal flow from, among others, investors trying to sell ‘07 and ‘08 vintage year funds, in particular at the large end of the market,” said Immanuel Rubin, a vice president at Campbell Lutyens.

If a buyer picks up one of these late vintage secondaries at a significant discount – or even gets paid by the vendor to take it on – they will be buying exposure to investments made in the next three years, which many people believe could be the greatest vintages ever.

Obviously there are potential downsides. The one or two pre-crunch assets already in the portfolio could potentially be worthless in terms of equity and could end up costing partners more in equity injections.

And the timing may not be ideal. While most would argue that we are about to enter some fine vintage years for private equity investments, there is the possibility that investments made in 2009 could yet suffer if trading conditions get even worse.

Notwithstanding the potential risks, these secondaries with plenty of uncalled dry powder could be thought of as new commitments available at a discount. Perhaps more appealing, therefore, than a new fund, in which a dollar costs a dollar.

As a result, GPs planning a fundraising next year will now be competing against well priced secondary opportunities.

Add to this the fact that an increasing pool of institutional and fund of fund money is being channelled into new secondaries funds, and fundraising for primaries gets even tougher.