LONDON (Reuters) – JP Morgan Private Equity Ltd (JPEL.L) is raising an initial $50 million to invest in secondary assets, nibbling at the outer edges of the market where there is less competition.
“We are hitting what is likely to be the best secondary market that anyone has seen in the last 20 years given the high number of investors seeking liquidity, whether it’s banks, pension funds, insurers, or hedge funds,” said Greg Getschow, managing director, private equity at JP Morgan Asset Management.
The listed fund has a market capitalization of $500 million, but values its portfolio at $1.2 billion in assets. It is targeting cheap deals of $5 million or below, where the bigger funds do not participate.
In particular, Getschow said he was seeking out “motivated” sellers, or those who desperately need liquidity. He cited one deal this year with an unnamed financial institution that needed to sell for regulatory reasons.
He said this had cost only 5 million euros ($6.99 million) but the asset size was much bigger.
“There can be some good opportunities around quarter or year end as institutions clean up their balance sheets,” he said. “That can be the best bargain you’ll ever see because these are motivated sellers, but you have to move fast.”
He said the best opportunities were coming from financial institutions such as banks and hedge funds, but endowments and high net worth individuals were also looking for liquidity.
“In normal cycles you may see one type of investor that has an incentive to sell but in this market almost everyone you can imagine is a seller,” he said.
JPEL is looking to take positions where M&A activity is likely, for a speedy exit. Getschow cited healthcare equipment and services and U.S. for-profit education companies as providing interesting opportunities.
Secondaries transactions are picking up but have been slow to conclude as potential sellers are reluctant to part with their assets due to market uncertainty. “There is still a big bid/ask spread which has prevented some transactions from going through.”
Getschow thought things would improve toward autumn as prices are starting to come in. He is now seeing high quality assets at 60 to 70 percent discounts to their intrinsic value.
About six months ago the fund started to buy some real estate, capitalizing on distressed sellers. “We needed to find deals that were not over-geared, so we avoided luxury properties and looked more at mid-market apartments,” said Getschow.
The trust found one financial seller and a publicly traded entity that needed liquidity, and real estate now accounts for some 10 percent of the portfolio.
(Editing by David Cowell)