2009 was a particularly difficult year for investors in private equity real estate funds. Many institutions found themselves over-allocated to the asset class at the beginning of the year as a result of the denominator effect, and this led many to consider exiting private real estate fund investments. The worst affected sought relief via redemptions on their open-ended real estate fund commitments, while a number became interested in selling fund stakes on the secondary market. There was also an increase in the number of investors interested in purchasing fund stakes on the secondary market, with many believing that there were opportunities to buy funds at a considerably discounted price. Significant numbers of both interested buyers and sellers should have resulted in a high number of secondary transactions; however, activity fell short of expectations in 2009. The main reason for this was the valuation gap between buyers and sellers. Despite this, the secondary market has remained an area of interest for investors in the asset class.
43% of real estate investors are interested in purchasing stakes in private equity real estate funds in the next 24 months. Secondary market investments can offer portfolio diversification by vintage year, mitigation of the J-curve effect and therefore quicker returns, and the potential to access top performing managers at discounts to the net asset value of the fund. 20% of investors are considering offering PERE stakes for sale on the secondary market. The secondary market can be used as a portfolio management tool as investors can generate liquidity through secondary sales and rebalance and restructure their portfolios.
Appetite for secondary market purchases is not limited to specialist secondary market players and fund of funds managers. A significant proportion of asset managers (55%) and insurance companies (58%) are interested in buying on the secondary market. Many of these non-traditional buyers may consider immature second-hand fund interests as a cost-effective alternative to making new primary commitments. 44% of asset managers, 41% of real estate fund of funds managers, 26% of endowments and 25% of insurance companies will consider selling PERE fund interests. There are a number of motivations for institutions to consider secondary sales, and these can differ depending on their own investment policies. Many endowments, for instance, employ an over commitment strategy to private equity real estate and, during the financial downturn, when there was a slowdown in distributions and a lack of regular income through benefactors to these institutions, they struggled to fund capital calls. Whereas many fund of funds managers use the secondary market to streamline their portfolios, modify their investment focus, or exit poorly performing investments.
While the secondary market has yet to take off in terms of transaction volume, there is still significant interest in both buying and selling private equity fund interests across investor types and locations.
private equity secondary market is a rapidly evolving and non-transparent market. Preqin's Secondary Market Monitor provides vital intelligence on the secondaries market for sellers, buyers and advisors.