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Secondary PE Deal Making Strong In 2011, Thanks to Pension Funds

This year’s secondary market for private equity is expected to outpace last year’s, sources tell peHUB. LPs—particularly, pension funds—are doing more to get out of LBO firms and reallocate into cash, according to interviews with PE professionals and secondary transaction execs.

One such pension LP is the secretive $22 billion Indiana Public Retirement System, which is said by sources to be looking to deal hundreds of millions of dollars’ worth of private equity investments. They’re not alone (as we have mentioned before).

“There are a lot of them out there with increasing obligations to deal with,” said one source who regularly negotiates secondary deals.

LPs have quietly dealt stakes worth hundreds of millions, even more than $1 billion in some cases, in the last two years to a growing roster of buyers as the bid-ask price on secondary stakes has narrowed, sources said. Part of the reason at some pension funds is to satisfy growing liquidity needs from retirees. Other LPs are looking increasingly to back distressed funds, sources said, notably those that will operate in Europe, from GPs such as Apollo.

Still, there is limited insight into how willing LPs are to part with brand-name investments—and not just in the case of INPRS, which doesn’t publicize the funds it backs. One source indicated many top-quartile GPs—be they VC or PE—will not forget which LPs unload stakes, and that this will impact their relationship with future funds. Sources tell peHUB that most top-quartile PE and VC firms will not look kindly on their LPs dumping their investment early and that they’ll remember who sold out on them the next time a fund is raised.

“Of course, bigger pensions have more leverage” when it comes to dealing secondary stakes, and still maintaining a relationship with GPs, one source said.

Case in point: the Harvard Management Company is said by one source to be selling off its holdings in North Bridge Growth Equity Venture Partners, Formative Ventures, Claremont Creek Ventures and private equity investor Chrys Capital. Harvard did not provide comment for this story.

In some cases, buyers are increasingly turning up through individual family offices. Sources said that often a family office that seeks to do business with an existing firm will snap up secondary stakes.

However, the bid-ask on most secondary PE stakes has shrunk, sources said, and there are fewer deals to be had. The topsy-turvy markets, influenced by wildly fluctuating European debt issues, aren’t helping either.

“Things are slowing down to end the year,” a source who negotiates transactions in secondaries told peHUB. “It is noticeable.”