Secondary Market: Challenging the Illiquidity Myth Download Data

View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-March-2015.pdf

Feature Article Secondary Market: Challenging the Illiquidity Myth Download Data

Secondary Market: Challenging the Illiquidity Myth

Preqin recently surveyed over 50 managers of dedicated secondaries assets to find out about their activity in 2014 and to assess their outlook on the market for 2015. Patrick Adefuye analyzes the key findings from these results.

2014 was not only a record year for secondaries transaction volume, Fig. 1: Expectations for the Amount of Capital to Be but has also been recognized as a record year for secondaries Deployed in the Secondary Market in 2015 Compared to fundraising; an aggregate $29bn was secured by the 27 secondaries 2014 funds that reached a ﬁ nal close during the year, the highest ever annual amount of capital secured. As a result, two-thirds of secondary fund of funds managers surveyed expect to deploy more capital in the asset class in 2015 compared to the previous year (Fig. 1). A 6% further 27% indicated that they expected to maintain their level of More Capital in spend in 2015. 2015 Compared to 2014 27% Pricing Same Amount of Capital in 2015 as It is clear that the secondary market is awash with capital, from in 2014 the managers of secondaries funds, fund of funds vehicles with allocations to the secondary market and opportunistic institutional 67% Less Capital in 2015 investors that are capable of gaining exposure to it. Inevitably, Compared to 2014 pricing is impacted by this strong demand for funds on the secondary market. Survey respondents indicated that the average price paid for buyout funds purchased on the secondary market was 90% of NAV, although this can be as low as 70% of NAV for mature assets. Source: Preqin Secondary Fund Manager Survey, February 2015 In 2015, 45% of respondents indicated that they expect the price paid for buyout funds on the secondary market to increase (discount to narrow), while 48% expect it to remain the same. Given the expected Leverage increase in spend from the majority of respondents, strong pricing does not appear to be deterring buyers. Not only is there capital One concern regarding the higher prices being paid for assets is the available to pay more (on a dollar basis, as well as on a percentage impact this may have on returns and that returns for assets bought to NAV basis given that NAVs are also rising), there is also the on the secondary market in this current climate are likely to be lower willingness to do so, as the sentiment towards private equity and than previous years. Anecdotally, it appears that secondary market particularly buyout funds is positive given the strong environment for buyers have turned increasingly to leverage to improve returns. exits and distributions. While the majority of fund managers that we spoke to did not use debt for acquiring funds (81%) or in funding a drawdown (89%) in 2014, debt is likely to play a bigger part in the secondary market

Fig. 3: Breakdown of Investor Types Managers of Fig. 2: Managers of Secondaries Funds’ Expectations for the Secondaries Funds Expect to Be Active in Selling Fund Amount of Debt Usage in the Secondary Market in 2015 Interests in 2015

All Investor Types 24% 0% Pension Funds 42% Increase in Debt Usage in 2015 Banks 36% Compared to 2014 34% Insurance Companies 29% Same Amount of Debt Usage in 2015 Fund of Fund Managers 27% as in 2014 Endowment Plans 20% 66% Decrease in Debt Usage in 2015 Family Offices 13% Compared to 2014 Foundations 11%

0% 10% 20% 30% 40% 50% Proportion of Respondents Source: Preqin Secondary Fund Manager Survey, February 2015 Source: Preqin Secondary Fund Manager Survey, February 2015

3 Private Equity Spotlight / March 2015 © 2015 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-March-2015.pdf

Feature Article Secondary Market: Challenging the Illiquidity Myth Download Data

Fig. 5: Breakdown of Funds Purchased on the Secondary Fig. 4: Breakdown of Likely and Opportunistic Secondary Market by Managers of Secondaries Funds in 2014 by Fund Market Sellers’ Portfolios by Vintage Year Type

45% 41% Buyout 65% 40%

35% Growth 44%

30% Venture Capital 42% 25% Infrastructure 15% 20% 19% 17% 16% 15% Real Estate 13% Proportion of Funds 10% Private Debt 12% 6% 5% 2% Mezzanine 12% 0% Pre-1997 1997-2000 2001-2004 2005-2008 2009-2012 Post-2012 0% 10% 20% 30% 40% 50% 60% 70% Vintage Year Proportion of Respondents Source: Preqin Secondary Market Monitor Source: Preqin Secondary Fund Manager Survey, February 2015

in 2015. Thirty-four percent of respondents expect debt usage to from buyers (and frequently have sold stakes before) and; increase in 2015, while the remaining 66% predict it will remain the • Possible sellers, which are investors that are either over- same, as shown in Fig. 2. No respondents expect the level of debt allocated to a particular asset class and could consider the usage to decrease in the coming year. secondary market to rectify this, or investors that have put new investments on hold and therefore may be reviewing one or Secondary Market Sellers more of their manager relationships.

Managers of secondaries funds were asked to indicate which groups Analysis of the portfolios (specifi cally private equity) of likely and of investors would be selling funds in 2015, with pension funds opportunistic sellers show interesting results that further illustrate cited by 42% of respondents, as shown in Fig. 3. Pension funds their motivations for considering the secondary market. Fig. have become increasingly comfortable using the secondary market 4 shows the vintage year spread of the portfolios of likely and in recent years in order to achieve their desired portfolios. Banks opportunistic sellers profi led on Secondary Market Monitor and and insurance companies (cited by 36% and 29% of respondents shows that these investors are most exposed to funds that are 7-10 respectively) are also expected to be prominent sellers in the year years old, accounting for 41% of all funds held by these investors. ahead, both for regulatory reasons. Funds of vintage years 2005-2008 are considered the sweet spot for most secondary buyers, as funds of this age are typically at Preqin’s research team is in daily contact with institutional investors their realization phase returning capital to investors. Interestingly, in order to identify new sellers and update the investment plans of likely and opportunistic sellers have signifi cant exposure to funds existing investors. Sellers are classifi ed into two groups: that are 10 years old or more, representing 38% of funds held by these investors and therefore, in most cases, past their pre-agreed • Likely and opportunistic sellers that have pro-actively begun life-time. Collectively, these funds have a total of over $100bn in a process to sell funds or are generally open to approaches remaining, unrealized value.

Fig. 6: Sample of Frequently Traded Europe-Focused Buyout Funds in 2014

Fund Firm Vintage Fund Size ($bn) Firm Headquarters Apax Europe VII Apax Partners 2007 17.7 UK BC European Cap VIII BC Partners 2005 7.7 UK BlueGem BlueGem Capital Partners 2007 0.3 UK Bridgepoint Europe I Bridgepoint 1998 1.7 UK Charterhouse Capital Partners IX Charterhouse Capital Partners 2009 5.2 UK Cinven IV Cinven 2007 8.3 UK Doughty Hanson & Co V Doughty Hanson Partners 2007 4.0 UK Electra European Fund II Motion Equity Partners 2005 1.5 France EQT V EQT 2006 5.6 Sweden IK VII Fund IK Investment Partners 2012 1.8 UK PAI Europe V PAI Partners 2008 4.2 France

Source: Preqin Secondary Market Monitor

4 Private Equity Spotlight / March 2015 © 2015 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-March-2015.pdf

Feature Article Secondary Market: Challenging the Illiquidity Myth Download Data

Funds Traded Transaction Types

The majority (65%) of managers of secondaries funds surveyed Managers of secondaries funds were asked about the types of indicated that they had purchased interests in buyout funds in transactions they completed in 2014. Transactions were classifi ed 2014 as shown in Fig. 5. Incidentally, a third of respondents expect into traditional fund transactions (portfolio and single interests), to expend more on purchasing buyout funds in 2015 than 2014. direct secondaries, GP restructurings, tail-end fund purchases and Growth capital funds were purchased by just under half (44%) of spin-outs. Unsurprisingly, the single fund purchase was the most respondents, with venture capital funds the next most purchased common transaction type completed, with over three-quarters (77%) by respondents (42%). Infrastructure and real estate funds were of respondents completing a transaction of this sort in 2014, as purchased by a small proportion of respondents (15% and 13% illustrated in Fig. 7. respectively). Sixty percent of respondents completed a purchase of a portfolio of Transactions funds, while a notable proportion (33%) completed purchases of tail- end funds and GP restructurings. A number of mature funds have Preqin’s improved Secondary Market Monitor can be used to pin- signifi cant unrealized value; it appears buyers see value in these point transactions involving specifi c managers and specifi c fund funds given the proportion of managers that completed transactions types (as an indicator of the level of demand for, and liquidity of, of this type in 2014. Furthermore, 25% of survey respondents those funds), recent sellers and certain fi rm types selling funds over anticipate increasing their activity relating to tail-end funds in 2015 different timeframes. compared to 2014 (Fig. 8).

Fig. 6 draws on this transaction data and shows some of the most GP restructurings are noted to have increased in prominence in frequently traded Europe-focused buyout funds in 2014. Funds such recent years as a solution for LPs and GPs for funds close to, or as these, that trade fairly frequently, can be sold relatively quickly past, their agreed term. Secondary buyers provide new capital to the on the secondary market as buyers require little to no additional GP while simultaneously buying out existing LPs; the complexity of information to offer a price indication for them. these transactions has not been a deterrent to some buyers. Indeed, as shown in Fig. 8, 19% of survey respondents anticipate completing more of these transactions in 2015.

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For queries. please contact IK Song [email protected] +822 360 4209 www.asksummit.co.kr View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-March-2015.pdf

Feature Article Secondary Market: Challenging the Illiquidity Myth Download Data

Thirty-one percent of respondents completed direct secondaries Preqin tracks which types of transaction different buyers are open to; transactions in 2014; these transactions again reﬂ ect the amount of for a GP or an intermediary managing a restructuring process, it is capital locked in mature funds, with a secondary sale offering GPs vital to be able to identify buyers with the willingness and experience the opportunity to return capital to investors. Direct secondaries will to complete such transactions. In addition, Secondary Market continue to feature in 2015, with 21% of respondents anticipating Monitor shows which investors are open to stapled secondaries increasing their activity in direct secondaries transactions in 2015 transactions. For holders of tail-end funds, Preqin is keeping tabs on compared to 2014. the small but growing number of secondary buyers that see value in such transactions.

Fig. 8: Managers of Secondaries Funds’ Expectations for the Fig. 7: Breakdown of Transaction Types Completed by Level of Secondary Market Activity in 2015 Compared to Managers of Secondaries Funds in 2014 2014 by Transaction Type

100% 2% 2% 2% 0% 2% 0% Single Fund Purchase 77% 90% Expect Activity to Decrease in 2015 80% Compared to 2014 70% Portfolio Purchase 60% 60% 62% 60% 71% 77% 77% Expect Activity to 88% 50% Remain the Same in GP Restructuring 33% 40% 2015 as in 2014 30% Expect Activity to Tail-End Fund Purchase 33% 20% 37% 35% Increase in 2015 10% 25% 21% 19% Compared to 2014 Proportion of Respondents 10% 0% Direct Secondary 31% GP

GP Spin-Off 10% Direct Portfolio Purchase Purchase Secondary Purchase Single Fund GP Spin-Off Restructuring 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Tail-End Fund Proportion of Respondents Transaction Type Source: Preqin Secondary Fund Manager Survey, February 2015 Source: Preqin Secondary Fund Manager Survey, February 2015

Secondary Market: Challenging the Illiquidity Myth

This feature article is an extract from the recently released Preqin Special Report – Secondary Market: Challenging the Illiquidity Myth. The full report includes:

Content Includes: Secondary Market: Challenging the Illiquidity Myth

• Full results of Preqin’s most recent survey of managers of secondaries funds, which looks at the amount Fund Manager Outlook March 2015 Are managers of secondaries funds looking to invest more capital in of capital they plan to invest in 2015 and which types of investors they expect to be active in the year 2015 than in 2014?

Buyers

Which institutional investors are most likely to purchase ahead. fund interests on the secondary market?

• An overview of buyer activity that ascertains which institutional investors are most likely to purchase Pricing What is the average price paid for a fund interest on fund interests on the secondary market. the secondary market? Funds Traded

Which fund types were most commonly traded on the secondary market in • A look at average prices paid for fund interests on the secondary market. 2014?

Potential Sellers • Analysis of the funds most commonly traded on the secondary market in 2014. What are investors’ motivations for selling fund interests on the secondary market?

• Investors’ motivations for selling fund interests on the secondary market. alternative assets. intelligent data.

This free report has been compiled using detailed information and key data available on Preqin’s Secondary Market Monitor online service. To access the report, please click here, or visit the Preqin Research Center:

www.preqin.com/research

Data Source

Preqin’s Secondary Market Monitor contains detailed information on all 350 secondaries funds in market and closed historically, including interim and ﬁ nal closes, geographic preferences, sample investors and more.

Secondary Market Monitor can also be used to source potential sellers of fund interests, ﬁ nd out which LPs are looking to invest in secondaries, analyze the latest secondaries fundraising activity, view private equity market transactions and identify key secondary intermediaries.

For more information, please visit:

www.preqin.com/smm