Preqin’s Secondary Market Monitor currently tracks 744 investors that are open to using the secondary market as a method of acquiring positions in private equity funds. Of these potential buyers, 141 (19%) look to the secondary market for opportunities to buy portfolios of private equity fund interests in addition to purchasing single fund stakes.
This willingness to acquire multiple fund stakes in a single transaction is strongly driven by the sell-side of the secondary market. In addition to using the market to exit investments on a case-by-case basis, sellers are now making large portfolios available for purchase, particularly those looking to exit the private equity asset class. By marketing multiple assets as one package, the seller only needs to find one buyer (or sometimes a group of buyers operating as one unit), rather than selling to various different buyers. This typically results in a quicker sale, while reducing the costs associated with the intermediation on secondary transactions.
From the perspective of the buyer, portfolio purchases can be attractive. In the case of a seller needing to divest its private equity fund interests to fall in line with regulations, it may be willing to take a substantial haircut to liquidate all of its assets in one transaction, resulting in greater discounts for buyers. Portfolio purchases involve multiple fund positions and can contain exposure to a wide range of managers and companies, therefore offering a form of risk mitigation.
In addition to a diverse number of positions, portfolio purchases can involve larger transaction fees and consequently require larger pools of capital to execute. This means that a prospective buyer must possess a high level of market knowledge and deploy significant resources into researching the various components of the portfolio.
Given these characteristics, the breakdown of investors that are willing to take part in a portfolio purchase by firm type is not altogether surprising. As shown below, 43% of the 141 investors that are open to acquiring private equity portfolios are private equity fund of funds managers, while a further 20% are secondary fund of funds managers.
These firms have defined secondary market strategies, often allocating a significant proportion of their capital to the secondary market. They raise dedicated secondaries vehicles and have proven track records operating in the secondary market, meaning they are more willing and capable of executing larger-scale, complex portfolio transactions.
Portfolio purchases are a key component of the private equity secondary market. However, the competition surrounding deals and large transaction sizes are barriers to many secondary market participants. Consequently, for the time being at least, portfolio purchases will be dominated by established firms with huge capital pools and long-standing secondaries expertise.