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Secondary Market Now Driven by Mega-Funds, Not LP Liquidity

Secondary sales of private equity stakes are largely a mega-fund activity, according to Todd Glasson of InvestorFlow, which provides a qualified matching service (QMS) platform and other investor relationship management services. He predicts a continued increase in secondary sales next year from the largest buyout firms but said QMS activity has not trickled down into the middle market.

A number of large buyout firms have implemented captive QMS operations to support general partners in the sale processes and allow the firm to increase safe harbor limitations on the percentage of the fund that can change hands in a given year from 2% without a QMS to 10% with one.

Prior to recent months, limited partners’ main motivation for selling was their own liquidity problems. At this point, most of the cash-strapped portfolio sales have already come to market, including the auction for much of Stanford University’s approximately $600 million alternatives portfolio. So most sellers in the market now are not distressed, Glasson said. Rather, they’re selling to get out of mega-funds which are exposed to high-profile, high-risk deals. The trend has not trickled down into the middle market. “We’re talking to the top 50 private equity firms that have been involved in high profile deals that, according to the media, could turn into Chapter 11s. LPs are hedging their risks,” he said.

Buyout investors haven’t felt that way about middle market deals, even though they have made up the majority of LBO-backed bankruptcies in 2008 and 2009.  Glasson said, “(Middle market) funds are small enough where they may not allow their LPs to sell. The mega funds understand the need to maintain long-term relationships with their larger investors and provide them the flexibility to sell.” General partners have the final say in approving secondary sales of their funds.

Sun Capital Partners and THL Partners have set up captive QMS services for their respective fifth and sixth funds, according to reports.

Glasson said he expects that all of the major funds will have captive QMS systems in place over time. “In general, the private equity market will continue to become more liquid. GPs don’t want that to happen, but all markets ultimately want to become more liquid. Active portfolio management is the long-term trend and increased liquidity options can only help the industry grow.”


QMS Firm Estimates 20% of Funds Have Already Maxed Out On Secondary Sales for 2009