Secondary Market Notebook

Last Friday, I participated in a secondary investing conference, hosted by DealFlow Media. My piece was a 20 minute Q&A (I gave the A’s, which was a refleshing change of pace), but I also watched some of the panel discussions and had a few takeaways:

* The secondary market’s stickiest wicket continues to be the gap between buyside and sellside pricing expectations. Rather than trying to bridge the divide, it would appear that both sides are calcifying – believing that the other will cave.

For buyers, that means banking on a theory that increased capital call volume will push some LPs over the line from liquidity-parched to liquidity-desperate. Sellers, on the other hand, counter that an increase in capital calls is likely to be coupled with an increase in distributions, which could help them maintain an even keel.

Let me add one more variable into the mix: Secondary firms have raised a ton of money over the past 24 months, and at some point will need to either invest big or shrink fund sizes. I understand fears of catching a falling knife, but what is the current excuse for extreme caution? Today’s private equity deals – in the aggregate – should be winners, based on the overall economic environment. If a prospective deal is mostly unfunded commitments from a historically-strong manager, then a hesitance to buy seems to be a general lack of faith in the asset class. That’s fine, but what are you doing collecting management fees on a fund designed to invest in said asset class?

* On the other hand, buyers have legitimate frustrations when it comes to wide variations in GP reporting (particularly on club deals). One panelist noted that Harrah’s is valued at anywhere from 25 cents to 75 cents on the dollar, depending on the general partner.

* Princeton is one of the few Ivys to have not yet offered its stakes on the secondary market. One panelist suggested that it was just kicking the can down the road, but that it would soon have a “come to Jesus moment.”

* Lots of focus on endowments like Stanford, but the next big secondary opportunities could be from public pensions that have major commercial real estate exposure.

* A couple panelist predictions for the year ahead: (1) We’ll see GPs do a bunch of bundling of their own fund interests; (2) GPs will try including more liquidation options in their own funds.