Just how easy is it to buy or sell a stake in a private equity or real estate fund? For years, the only way most LPs could discover the answer to this question was by engaging a broker and going to market, or calling up some trusted contacts.
However, there’s a new method in town, courtesy of Toronto-based Setter Capital.
Setter is a secondaries advisor that has been active in the market since 2006, and claims to now cover over 7,000 institutional investors and over 3,000 fund families – by which it means funds managed by a particular GP that have a similar strategy. The firm has used this experience to develop a global Liquidity Rating, a measure of the relative liquidity of fund interests.
The idea is that these ‘fund families’ are split into four categories – ’Good‘, ’Very Good‘, ’Excellent’ or ‘Unrated’ – depending primarily on the number of likely buyers for an interest in one of the funds. That might include those who have previously registered an interest in that fund with Setter, those who have previously priced the fund, or other primary investors in the fund who are known to buy secondaries.
“We’ve always tracked the number of potential buyers for particular funds and fund families closely,” says Setter managing director Peter McGrath. “It helps us determine who to approach on different secondary opportunities and to move quickly and efficiently.”
The reaction’s been amazing. People are immediately saying that it’s a very useful metric, for primary investing and for secondary buying. If you are considering selling a fund, you know that if the fund is ‘Rated’ you can get out relatively easily and there will be a lot of competitive tension.
Peter McGrath, managing director, Setter Capital
The rating is then tweaked based on factors like the GP’s openness to secondary transactions. For example, there may be 100 potential buyers for a particular fund interest, but if only 20 of those would be acceptable to the GP, then the liquidity rating will have to be adjusted down accordingly. Setter will also factor in its subjective view on the likely strength of demand in the current climate. “Part of it is subjective, because it’s based on our knowledge of the buyer base,” says McGrath. “There may be a lot of buyers, but we also consider how strong and serious that demand is.”
One way in which Setter hopes to get its index out onto the market is via a new site called Secondary Link, which is basically a social network for secondaries buyers and sellers. As well as allowing registered users to access the Liquidity Rating for different fund families, the site also allows potential buyers to register their interest in a particular fund – and provides a mechanism for sellers to contact them (a service for which Setter will apparently not take a broker’s fee). It also allows investors to collaborate on due diligence for a particular fund.
It’s all very much in the early stages; the site had been fully operational for less than a week at press time. But McGrath says that initial feedback has been good. “The reaction’s been amazing. People are immediately saying that it’s a very useful metric, for primary investing and for secondary buying. If you are considering selling a fund, you know that if the fund is ‘Rated’ you can get out relatively easily and there will be a lot of competitive tension. And if you want to buy a particular fund, you can see whether or not it’s a fund that everyone likes. It’s akin to knowing the trading volume of a listed stock.”