Secondaries Seeing a Rebound

After a surprisingly sluggish 2009, secondary dealmaking is on the rise.

The latest deal comes from Bank of America, which reportedly is selling $1.2 billion of commitments made to various Warburg Pincus funds. Around half of it will go to Lexington Partners and China Investment Corp. This comes just a couple of months after BoA sold a $1.9 billion portfolio of PE fund interests to the secondary arm of AXA Private Equity.

Earlier this month, Citigroup agreed to sell $900 million of PE interests to Lexington Partners, while RBS reportedly is close to selling a $500 million portfolio to Alpinvest.

With distributions more difficult to get, LPs are using the secondaries market as another way to gain liquidity, says Antoine Dréan, founder and CEO Triago. Prices in the secondary market are also “quite fair,” says Dréan, who declined to comment on the BofA transaction. “This wasn’t the case in early 2009 when we had fire sales,” he says.

However, Lawrence Penn, managing director at The Camelot Group, which advises on PE secondaries, doesn’t agree. “The price will never be fair [in the secondaries market] because you will never get perfect information,” he says. “In the public market, the information you get is pretty fair because there is a lot of information. There is a lot of granularity.”

Secondaries fundraising reached a record level of $22.9 billion last year, according to data from Preqin, with expectation that deal volume would match it. That didn’t happen. Secondary deals globally dropped to $12.7 billion in 2009 from $15 billion in 2008 and $16 billion in 2007.

Many of those that bought secondaries from late 2007 to 2009 “got crushed,” Penn says. “A lot of people who could’ve bought at a real significant discount in 2009 were too scared to purchase and they missed a great time to buy,” he says.

The recent surge in secondaries is not due to LPs getting better prices. “Remember, there is $2 trillion of cash on balance sheets and the activity will pick up. There will be more dealmaking going forward,” Penn says.

Penn predicts that those that buy secondaries from 2009 to 2011 will make “the best returns of a generation.”

BofA declined to comment.