In recent months, there have been an increasing number of institutional investors seeking to buy fund interests on the private equity secondary market. Of the potential buyers of fund interests profiled on Preqin’s Secondary Market Monitor, 54% could be described as non-specialist buyers. Pension funds are the most dominant as they account for 40% of all non-specialist buyers, while insurance companies comprise 14%.
In its summer 2009 Secondary Pricing Analysis, Cogent Partners - a specialist in brokering private equity secondary market transactions between buyers and sellers – provided a breakdown of the types of buyer involved in the secondary market transactions it represented in the first half of 2009. Cogent Partners’ analysis supports the findings of Preqin: it identified 43% of those buyers as non-specialists. Again, pension funds dominated as they accounted for 40% of those non-specialist buyers, while insurance companies comprised 18%.
There are a number of advantages that have attracted non-specialist buyers to the private equity secondary market. In the current climate, LPs are taking advantage of favourable fund pricing, which is enabling them to gain access to top private equity fund managers at substantial discounts to NAV. Furthermore, secondary investors are able to mitigate the effects of the J-curve, minimising risk while benefitting from shorter maturation periods. Purchasing private equity fund interests on the secondary market also allows investors to diversify their portfolios by vintage year and see what underlying investments they are committing to, avoiding investment in a so-called “blind pool”.