Giant Secondary Deal is a Win-Win

AXA Private Equity today announced that it has acquired a $1.9 billion portfolio of limited partner positions from Bank of America. 

It’s the largest disclosed secondary transaction since CalPERS sold a legacy portfolio at the end of 2007 for $2.1 billion, and perhaps an indication that buyers and sellers are finally bridging their long-standing price gap.

My snap verdict is that this is a win-win for both AXA and BoA. No one is disclosing pricing terms, but one can assume that AXA paid less than it would have were BoA to have opened the process to competitive bidding [Update: A source tells me that BoA did run a competitive, self-managed process, with two or three firms involved]. Moreover, continued economic recovery should help the portfolio increase in value over time (remember, people thought Lexington Partners paid too much for that $1 billion Chase portfolio back in 2000, and that worked out just fine for Lex).

BoA, on the other hand, likely made out much better than it would have were it to have sold 18 months ago (when it first began considering a sale), 12 months ago or even six months ago. Plus, the sale could give BoA some TARP-related benefits.

Some additional notes, largely based on a conversation this morning with AXA fund-of-funds chief Vincent Gombault:

 

  1. The portfolio is 90% buyout funds, of which 30% are considered “large funds.” The portfolio is considered “mature,” with around 60% of commitments already called down.
  2. Bank of America originally began speaking with potential buyers 18 months ago, including firms other than AXA. This would indicate that BoA’s interest in selling was not related to the proposed Volcker Rule (within Dodd financial reform bill), which would seemingly require banks to divest private equity investments. It is possible, however, that Volcker helped push this to the finish line.
  3. Gombault believes that we’ll see several more $1.5b+ secondary deals over the next 12 months.
  4. He declined to discuss specific pricing for the BoA deal, but said typical secondary pricing right now was at a single-digit discount to NAV. This compares to 20-30% discounts last December, 30-40% discounts last September and up to 70% discounts at the peak of the financial crisis. The last time secondary buyers regularly paid premiums to NAV was in 2006 and 2007 (up to 20%).
  5. Gombault: “Pricing is not as important to us as the strength of the assets. If you buy weak assets at a deep discount, your discount will be never-ending.”
  6. Gombault just returned to France, after being stuck in NYC due to the volcano. No, that is not really relevant to anything. Consider it color…