Private-equity secondary market
Unlike public markets, private-equity interests lack an established trading exchange, making transfers more complex and labor-intensive.
As GP-led transactions grow and institutional participation expands, the secondary market is expected to continue increasing in volume and complexity.
Subcategories include: The private-equity secondary market was originally created by Dayton Carr, the founder of Venture Capital Fund of America (VCFA Group), in 1982.
Carr had been managing a venture capital investment firm in partnership with Thomas J. Watson Jr. who was then Chairman of IBM Corporation.
Since its inception through VCFA Group the secondary industry now features dozens of dedicated firms and institutional investors that engage in the purchase and sale of private-equity interests.
[9] Such large volumes have been fueled by an increasing number of players over the years, which ultimately led to what today has become a highly competitive and fragmented market.
[19][20] In the years immediately following the dot-com crash, many investors sought an early exit from their outstanding commitments to the private equity asset class, particularly venture capital.
[22][23] In 2000, Coller Capital and Lexington Partners completed the purchase of over 250 direct equity investments valued at nearly $1 billion from National Westminster Bank.
[25] In 2003, HarbourVest acquired a $1.3 billion of private-equity fund interests in over 50 funds from UBS AG through a joint-venture transaction[26] That same year, Deutsche Bank sold a $2 billion investment portfolio to a consortium of secondary investors, led by AlpInvest Partners (formerly by NIB Capital), to form MidOcean Partners.
[29][30][31] During this period Secondaries transaction volume increased from historical levels of 2% or 3% of annual private-equity commitments to 5% or roughly 1% of the addressable market representing all existing private equity assets in circulation.
[32][33][34] Many of the largest financial institutions (e.g., Deutsche Bank, Abbey National, UBS AG) sold portfolios of direct investments and "pay-to-play" funds portfolios that were typically used as a means to gain entry to lucrative leveraged finance and mergers and acquisitions assignments but had created hundreds of millions of dollars of losses.
It was during this time that the market evolved from what had previously been a relatively small niche into a functioning and important area of the private-equity industry.
Prior to 2004, the market was still characterized by limited liquidity and distressed prices with private-equity funds trading at significant discounts to fair value.
Secondaries market growth accelerated as the mid-2000s buyout boom picked up steam culminating in the milestone California Public Employees' Retirement System (CalPERS) transaction in which it sold a $2.1 billion portfolio of legacy private-equity funds at the end of 2007, after an extensive first-of-its-kind auction process managed by UBS Investment Bank.
[38][39] The CalPERS transaction came closely on the heels of other UBS-managed auctions for Ohio Bureau of Workers' Compensation which sold a $650 million portfolio of private-equity fund interests to a consortium of buyers led by Pomona Capital[40][41] as well as MetLife which sold $400 million portfolio of private-equity fund interests to CSFB Strategic Partners.
Pricing in the market fell steadily throughout 2008 as the supply of interests began to greatly outstrip demand and the outlook for leveraged buyout and other private-equity investments worsened.
In these transactions, sellers were willing to accept major discounts to current valuations (typically in reference to the previous quarterly net asset value published by the underlying private-equity fund manager) as they faced the prospect of further asset write-downs in their existing portfolios or as they had to achieve liquidity under a limited amount of time.
[44] Private-equity fund managers published their December 2008 valuations with substantial write-downs to reflect the falling value of the underlying companies.
However, the volumes on the secondary market were not expected to decrease in 2012 compared to 2011, a record year[52] as, in addition to the banks under pressure from the Basel III regulations, other institutional investors, including pension funds, insurance companies and sovereign wealth funds continued to utilize the secondary market to divest assets.
[60] Growth in the secondary market continued trending upward in 2013 reaching its highest level yet, with an estimated total transaction volume of $36bn.
