Who’s Active In Secondaries? Anyone BUT Secondary Firms

At least that’s what a new mid-year report from Cogent Partners observes. The secondary intermediary firm closed more than $2.5 billion worth of transactions in the first half of 2009, and less than 20% of those deals had a traditional secondary fund on the buyside. (See first chart below)

That’s troubling news considering the sheer amount of money secondary funds raised last year. Thomson Reuters doesn’t track secondary fundraising but an unscientific survey revealed that just nine placement agencies raised a collective $24.1 billion in secondary funds in 2008, to give you a sense of the market. Meanwhile a chart peHUB published in April estimates that secondary firms raising new funds are targeting an additional $33 billion in commitments.

Yet despite rampant enthusiasm for the deeply discounted secondary market earlier this year, the wave of activity has yet to take place. Traditional buyers have largely remained on the sidelines, thanks to sellers’ unwillingness to sell at such steep discounts.

According to the Cogent report, the more active buyers in the secondary market include pension funds, insurance companies, family offices, endowments, foundations and general partners themselves. (See second chart below) More than half of the deals Cogent advised on went to first-time secondary buyers.

So it would appear that the secondary market is booming, just not for the players that we expected to take advantage of it.

Still, pricing remained low for completed transactions, Cogent reported. The average high bid was 39.6% of NAV (net asset value). The average low bid was 31.6% of NAV.

The average deal value was much lower for funds raised in 2007. We already assumed 2007 is a considered black-eye vintage year, and the secondary market proves it: pricing on sales of 2007 vintage funds averaged out at 26.1% of NAV, compared with 39.7% of NAV for 2006 vintage funds and 41.3% NAV for 2008 vintage funds. Cogent’s theory on the stark contrast is that 2007 has the worst of both worlds:

This may be explained by the fact that, while 2006 funds may have made bad investments and 2008 funds have large amounts of unfunded capital, 2007 is the only vintage which has both issues.

The other factor driving secondary market pricing is unfunded capital. For the first time, cash-constrained have been LPs were forced to sell highly unfunded partnerships. Funds with more than half of their capital called garnered much higher bids. On average, the high bids for half-funded partnerships, or “secondary lite” deals, was 42.7% of NAV, versus an average high bid of 27.2% of NAV for less-than-half-funded partnerships.

Chart 1: A breakdown of the buyers of secondary stakes.

Chart 2: A breakdown of the non-traditional buyers of secondary stakes.

Cogent Partners Secondary Pricing Analysis, Interim Update, Summer 2009

More of peHUB’s Coverage of the Secondary Market for Private Equity and Venture Capital:

Hungry For Secondary Funds? Here’s Who Is In Market
Neuberger Berman: Secondary Deal Flow At An All-Time High; Only Called 15% of Fund Last Year
Mark to (Secondary) Market? Nevermind!
Two Q’s, Two A’s On One of the Biggest Secondary Deals This Year
Four Secondary Real Estate Funds In The Market

Secondary Quote of the Day II: “We’ve been feeding investors two drugs”
Secondary Quote of the Day I: “Things are often popular for the wrong reasons.” -
How Can Secondaries Bring Liquidity to Cash-Constrained Fully Invested Funds?
Secondary-Palooza Still Waiting On The “Palooza

5 Secondary Questions for Brett Gordon, HarbourVest Partners
New Goldman Secondary Fund Already Marked Down
Live-Blogging PEA Outlook: Secondary Panel
Want to Invest in a Big Secondary Fund? Here Are Your Options
Yet Another Way To Invest in Secondaries
Conversus Capital: “Like a REIT for PE Assets”
What are “Secondary-Lite” Buyers Buying?
“Secondary-Lite” The Only Secondary Getting Done

Harvard Opens Massive Secondary Sale
QMS Firm Estimates 20% of Funds Have Already Maxed Out On Secondary Sales for 2009
New Probitas Vehicle Aims to Bridge Secondary Pricing Gap
There Are More Secondary Buyers Then Sellers, Survey Says

A Word of Warning to the Rash of New Secondary Intermediaries
Mark to (Secondary) Market: Take Two
PE Funds Maxing Out On Secondary Sales
Published Secondary Prices Are “Stale;” Venture Worse-Off Than PE

Could Secondaries Wipe Out the Primary Fundraising Market?
There’s a New Secondary Intermediary (Or Two) in Town
Park Hill Is Starting A Secondaries Group, Too

Q&A With a Secondaries Buyer: “We’re Making Specific Bets on Companies”
It’s a Buyer’s Market: Q&A With a Secondaries Intermediary
Secondary Prices Drop

4 Comments

  • I would ask Cogent for their data. Seems like these numbers should be examined further $2.5B in closed transaction value is impossible. Maybe this number includes transferred unfunded commitments?

  • The fact that secondary firms represent only 20% of CP’s activity is probably due to the fact that these firms can source deals on their own (thus avoiding any additional layer of fees).

    Ex-CP’s comment is on the money as well. The number has to include unfunded commitments.

  • I wouldn’t call this “troubling” for secondary funds…I’d be concerned for the buyers who outbid the secondary funds.

  • i think the real take away is that currently, there is a discrepancy between composition of market supply (recent vintage, highly unfunded positions) and buyside capital / demand (traditional secondary funds targeting mature opportunities). lexington, coller, landmark et al are not in the business of buying 1-2 year old partnerships which is probably why they represent such a low percentage.

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