Still on the “Secondary-Lite” beat, I stumbled upon a list of some funds that are considered attractive in the early stage secondary market. I spoke with Thomas Liadet, a Principal at placement agent and secondaries intermediary Campbell Lutyens, who said LP stakes in the following funds have drawn strong interest from investors:
- Apax Europe VII, a $13 billion pool raised in 2007.
- Lindsay Goldberg II is a 2006 vintage with $3.1 billion in commitments. As of the end of last year, it was 60% drawn down, placing it on the border between traditional and early stage secondary funds.
- Providence Equity Partners VI, a 2007-2007 vintage with $12.1 billion in commitments. It is 50% drawn down.
- HIG European Fund I, a 2007 vintage with $753 million in commitments.
- EQT North Europe V, vintage 2006, was at the time (end of last year) less than 60% drawn down of its $5.3 billion total.
The attraction comes in part, because of the vintage. Funds raised in 2007 that didn’t make too many investments last year are going to have the enviable stamp of “invested in a downturn” he said. That is, if they can ever get a seller to agree on a reasonable “downturn” price, I say.
Early stage secondary investors require less of a discount. While late-stage secondaries are marked at discounts of 60% to 80% (and, if you believe Clusterstock, as low as zero), earlier-stage secondary stages can be in the 40% to 60% range, Campbell said.
Often times the buyers of these LP stakes are funds of funds that have already made primary commitments to the funds. They’ve already done the diligence, but weren’t able to invest as much as they wanted into the fund the first time around. (Notably, it’s strange to be hearing about voracious investment appetites these days.)
Beyond the fund-of-funds, there are some firms who have raised dedicated early stage secondary funds. Campbell said AXA Private Equity, raised a $309 million fund dedicated to early stage secondaries in 2004 and he expects the firm to be raising a new fund for at least that amount. He also named Lexington Partners and Goldman Sachs as a buyer of early stage secondary stakes.
To be sure, when a secondary buyer purchases an entire portfolio of fund investments, it is likely to include at least a few highly unfunded early stage funds. That’s taken into account on pricing, one such buyer said. Even so, many secondary funds actively seek to avoid the “secondary-lite” deals because of the J-curve.
One thing I’m still working out in my mind is how the second-helping buyers like fund-of-funds are dealing with valuations. If they’ve got a primary stake of a fund on their books at one value, but then purchase another chunk of it at a massive discount, how do they reconcile the difference? It all comes back to the AICPA’s Draft Issues Paper on NAV valuations, which states LPs should value all of their holdings according to the levels at which the secondary market values them. Basically, a private sector “mark to market” for LPs.