Preqin’s Secondary Market Monitor online service shows that the top 10 secondary buyers in the market currently have an estimated aggregate $27.5bn in dry powder. As the private equity secondary market has evolved into an increasingly attractive investment arena for these investors, LPs have found varying ways in which to purchase fund stakes on the market, beyond the traditional practice of buying individual LP fund interests.
A number of investors use the secondary market in order to decrease their exposure to the asset class, or when they are looking to restructure investment portfolios. In these instances, investors may be presented with the opportunity to purchase an entire portfolio of private equity fund interests at a discount to net asset value. Alternatively, some GPs might look to sell portfolios of stakes in companies to a secondary buyer, otherwise known as direct secondaries, as a means of releasing capital that can then be returned to their investors.
Another reason for LPs turning to the secondary market in order to sell off private equity fund interests may be linked to changes in regulatory restrictions. Since the Volcker Rule was proposed in 2010, US banks have utilized the secondary market in order to sell off private equity units. Towards the end of 2013, Credit Suisse spun off its US-based private equity arm, DLJ Investment Partners, to Portfolio Advisors. Portfolio Advisors became the manager of DLJ Merchant Banking Partners I, DLJ Merchant Banking Partners II and DLJ Merchant Banking Partners III, and DLJ Investment Partners’ investment professional team joined the buyer firm.
A fifth type of secondary transaction that often appears on the market occurs when a GP is looking to restructure its fund. When a vehicle does not expect to achieve the return objectives the GP envisioned within the realization period, the GP may turn to an outside LP to purchase existing stakes in the vehicle and inject additional capital into the fund. Earlier this month, HarbourVest Partners completed a deal with Motion Equity Partners to restore and inject capital into the GP’s buyout fund, Electra European Fund II. The life of the fund was extended by four years in order to allow for further deals to take place, and existing investors in the vehicle were given the option of either selling their interests to HarbourVest Partners or remaining investors for the remaining four years. It is estimated that half of the existing LPs retained their fund interests.