After the interest in our post about Cogent Partners’ secondaries pricing report, I spoke with one of its authors, Cogent managing director Colin McGrady, about some trends he’s seeing in the market.
What’s the biggest concern for secondary sellers right now?
Institutional investors are really concerned that once the buyout funds start to believe the environment is good to make investments, those capital calls will come fast and furious. It won’t be a normalized capital calls pace. There will be nothing in terms of liquidity, and they’ll have a big wall of capital calls that come.
So, naturally, that’s affecting saturation on the secondary market.
As people budget for the next fiscal year, nobody is expecting any liquidity. They’re looking at uncalled capital and saying, “We could have a serious problem here.” The easiest way to solve that is the secondary market. But for immature interests in mega-caps, there is no market for those. The big buyers in the secondary market say, “We got our fill of those in ’07 when they were raising them. (The mega-buyout funds) didn’t turn away any capital.”
Why are the immature funds so unattractive?
You’re not getting a de-risked fund. If you found a buyer for any mega-cap fund raised in ’06 or ’07, that buyer could probably pay whatever they wanted to. Our study (read here) found those funds at less than the 61% NAV average.
How can LPs unload their unattractive portfolios?
A lot of funds have set a liquidity target and basically put everything on the table, including funds they’d like to hold on to, in the hopes of meeting that target.
So how are secondary funds taking advantage of the buyers market?
For one thing, we’ve had a huge increase in calls from sellers who have tried to sell their interests on their own and ended up abandoning the process. In December it was higher than we ever had. The reason is that buyers have been stalling, for reasons like they wanted to wait for Q4 numbers, or whatever.
That is a red herring. Not a single buyer buys based on the valuation a GP is holding. They do their own diligence. So when they continue to tell those prospective sellers to wait for Q4 valuations, they’re just stringing them along. Or maybe they used lower Q4 numbers as a way to justify the low price they planned to pay. Either way, eventually many sellers have said, “I can’t wait any longer,” admitting they’re desperate.
That’s bad for pricing. What else?
The other trend that plays into that is that buyers are being so darn selective on what they bid on, even on a proprietary basis. People are being really selective—they won’t bid on a whole portfolio if it has a fund they hadn’t heard of, or they end up breaking up pieces of an interest into smaller pieces.
Does breaking interests up hurt the value?
That actually drives up the value.
Can you describe how selective they are?
We get people calling in with specific requests—wish lists. “I want European buyouts,” or “I want Firm X, Y or Z.”
Does that make your job more difficult?
(Laughs) I’m happy to receive wish lists!