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Lead Article The Diversification of Secondaries Transactions Download Data

The Diversification of Secondaries Transactions

With the continued evolution of the already complex secondaries universe, Patrick Adefuye looks at the different types of strategies that are being increasingly adopted by maturing secondary buyers and sellers, providing details of transactions featured on Preqin’s Secondary Market Monitor.

As we move through 2014, limited partner interest in the secondary largest ever known secondaries sales being completed, as shown market remains strong, evidenced by the level of fundraising in Fig. 3. attained by secondaries funds in recent years. As seen in Fig. 1, $21bn was raised by dedicated secondaries funds in 2012 by 16 In 2013, however, it seems clear there have been fewer of these vehicles and $15bn was raised by 21 funds closed in 2013. As headline-grabbing portfolio divestments completed compared to shown in Fig. 2, vehicles being raised are ever larger, with funds the previous two years in particular. One factor may be the high closed in 2012 almost $1.5bn in size on average. Furthermore, top level of distributions LPs have received from managers which performing managers are now increasingly successful in attaining is delaying some investors in selling portfolios. Public market closes higher than their previous funds. strength and subsequent NAV increases may also have caused would-be sellers to hold on to their assets. However, large portfolio For instance, in July 2013, HarbourVest Partner’s Dover Street VIII divestments will continue to form an important source of deals successfully raised $3.6bn from investors, 24% more capital than for secondary buyers. For example, both OMERS and New York the vehicle’s predecessor. In February 2013, LGT Capital Partners City Employees’ Retirement System have long-term intentions to closed on $2bn for Crown Global Secondaries III, almost double signifi cantly reduce the number of their managers. CalPERS sees the amount raised for its previous secondaries fund. These fund its ideal number of private equity managers as between 100 and closings do not only refl ect the healthy levels of LP appetite that 120, implying a necessity to cull more than two-thirds (about 269) exist for these vehicles, but also a belief that attractive opportunities of its existing managers. Also, with the fi nalization of the Volcker continue to exist to invest in the secondary market. But what are Rule imminent, banks still holding third-party fund positions are these opportunities? likely to come to market to dispose of these.

1. Purchasing Portfolios of Funds The general consensus, judging by the estimates of the various fi rms that track secondary activity levels, is that secondary activity The traditional type of secondary market investment - the core grew in 2013. In light of the apparent lull in mega portfolio sales, it is for these large secondaries vehicles - is the acquisition of large clear that secondary players are diversifying. Preqin has observed portfolios of funds from limited partners. Indeed, the key driver a growing number of opportunistic investors selling positions in for this cycle of successful secondaries fundraising lies in the individual funds, which have gone come way to make up for the investment rationale that the dual effect of regulatory pressure on shortfall caused by fewer large portfolio sales. Preqin’s Secondary fi nancial institutions and the post-crisis behaviour of large pension Market Monitor profi les 309 investors that will consider selling funds in focusing their investments on fewer managers will create fund stakes on the secondary market. The pricing conditions are opportunities for certain investors to acquire large portfolios funds. favourable with the driving force of vast amounts of capital chasing This has certainly played out in recent years, with some of the deals behind them.

Fig. 1: Annual Private Equity Secondaries Fundraising, 2004 - Fig. 2: Average Size of Private Equity Secondaries Funds 2013 Closed, 2004 - 2013

25 1,600 23 1,470 22 21 21 21 1,400 20 21 1,282 20 1,235 1,200 16 No. of Funds 15 15 977 Closed 1,000 15 14 14 14 13 800 760 10 10 Aggregate 10 9 Capital Raised 589 9 600 551 ($bn) 519 7 445 388 6 400

5 Fund Size ($mn) Average 200

0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year of Final Close Year of Final Close Source: Preqin Secondary Market Monitor Source: Preqin Secondary Market Monitor

8 Private Equity Spotlight / March 2014 © 2014 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin_Private_Equity_Spotlight_March_2014.pdf

Lead Article The Diversification of Secondaries Transactions Download Data

2. Fund Restructurings Fund II. Refi nancing allows the fund to complete an extra two or three deals and an extension of its life by four years. Limited partners One observation from this past year is that there are a growing in the 2005 vintage fund were given the option of either selling their number of ‘non-traditional’ secondaries transactions taking stakes in the fund to HarbourVest Partners, or remaining invested place, different from the plain vanilla sale of fund interests from in it for the next four years. It is believed that around half of the an individual LP to a secondary buyer. One such type is in the investors chose the former option, with 20 investors remaining in so-called fund restructurings or fund recapitalizations. Such deals the fund. are usually general partner-led, stemming from a desire to fi nd a solution for investors in their funds that have exceeded (or are The obvious application of this type of transaction has been to close to exceeding) their life-span as set out in their fund terms, the so-called ‘zombie funds’ associated with managers that have with a substantial amount of assets still remaining in the fund. performed poorly and are unable to raise new capital. However, the model of investment can quite easily be applied to healthier fi rms Secondaries players have a role in providing patient capital to give that are managing older funds that have yet to reach full realization GPs opportunities to re-invigorate residual investments with cash for non-performance-related reasons, expanding the opportunity injections. Existing limited partners are given the option to exit set. Examples of GPs actively pursuing restructuring are Argan their position in the fund or to remain and take advantage of any Capital for its 2006 vintage fund and Perseus Capital, which has future upside. An example of such a transaction is Morgan Stanley commissioned secondary intermediary Cogent Capital to assist in Alternative Investments buying into Ferrer, Freeman & Co’s 2004 the restructuring of its ageing vehicles. It will represent a second vintage fund, FFC Partners III. In a deal 100% approved by the attempt at restructuring by the fi rm, highlighting the diffi culties that fund’s existing limited partners, an extension to the fund’s life was can be encountered in such deals, not least in reaching consensus accepted, with limited partners being offered the option to either with limited partners as to what the value of the fund should be. participate in this or liquidate their positions. 3. Acquisition of Private Equity Investment Arms Morgan Stanley AIP has had particular success in executing such deals, completing 12 since 2006 and fi ve in the past year alone. Another investment opportunity for secondaries funds comes in the A more recent example is HarbourVest Partners’ completion of a form of the captive private equity investment arms of banks. These restructuring deal for Motion Equity Partners’ Electra European fi rms, historically supported in their investments by the bank’s

Fig. 3: Largest Known Private Equity Fund Portfolio Sales

Seller Buyer(s) Transaction Year Price ($bn) Intermediary California Public Employees' Conversus Asset Management, HarbourVest Partners, UBS Investment Bank 2008 2.1 Retirement System (CalPERS) Jasper Ridge Partners, , Pantheon Private Funds Group Länsförsäkringar Abu Dhabi Investment Council, QIC 2012 2.0 Campbell Lutyens GM Asset Management State Administration of Foreign Exchange 2012 2.0 - Lloyds Banking Group Coller Capital 2012 2.0 Campbell Lutyens BAML Global Principal Ardian 2010 1.9 Greenhill & Co. Investments Citi Capital Advisors Ardian 2011 1.7 Greenhill & Co. Lloyds Banking Group Coller Capital 2012 1.7 Campbell Lutyens Public Sector Pension Undisclosed 2013 1.5 Cogent Partners Investment Board California Public Employees' Undisclosed 2012 1.5 - Retirement System (CalPERS) Dresdner Bank PineBridge Investments 2005 1.4 -

Source: Preqin Secondary Market Monitor Fig. 4: Top 10 Private Equity Secondary Fund Managers by Estimated Dry Powder

Firm Firm Location Estimated Dry Powder ($bn) Coller Capital UK 4.6 Lexington Partners US 4.3 Goldman Sachs AIMS Private Equity US 3.9 Ardian France 3.4 HarbourVest Partners US 3.0 Switzerland 2.1 Neuberger Berman US 1.8 LGT Capital Partners Switzerland 1.7 Strategic Partners Fund Solutions US 1.3 Newbury Partners US 1.2

Source: Preqin Secondary Market Monitor

9 Private Equity Spotlight / March 2014 © 2014 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin_Private_Equity_Spotlight_March_2014.pdf

Lead Article The Diversification of Secondaries Transactions Download Data

balance sheet, are being assisted in attaining spin-outs through secondaries players such as Cipio Partners, W Capital Partners capital provided by secondary players. The parent bank gets the and Vision Capital, but secondaries funds have also been looking chance to lessen its exposure by selling its existing interests, while at such opportunities. One avenue to such deals is in partnering the fund managers are simultaneously backed with capital for new with direct secondaries fi rms, as was the case in Sobera Capital’s investments. purchase of a portfolio of direct investments from BayTech Fund I. Sobera was backed by Switzerland-based fi rm A recent example of this is in a transaction led by HarbourVest Unigestion. Partners in a consortium that also included Coller Capital, funding the independence of Absa Capital Private Equity, the former captive Conclusion investment arm of Barclays Africa Group. The investors purchased Barclay’s entire 73.7% interest in 2006 vintage Absa Capital The secondary market is very crowded indeed given the ample Private Equity Fund I. The new company was named Rockwood capital available to secondary players. Combined, the largest 10 Private Equity. fund managers by estimated dry powder have a total of just over $27bn available for deployment, as shown in Fig. 4. In addition, Potential targets for secondary buyers include NBGI Private Equity, there is growing interest from institutional investors across the the -based private equity arm of National Bank of Greece, globe in directly taking part in the private equity secondary market. which is reportedly working with Cogent Partners to seek buyers Preqin’s Secondary Market Monitor tracks over 250 potential buyers for the fi rm. In addition, HSBC hired Campbell Lutyens to advise of secondary positions in private equity funds that are not primary on the potential sale of its direct principal investments arm. The or secondary fund of funds managers. To expend anticipated spin-out of One Equity Partners from JPMorgan Chase capital, secondary buyers are looking beyond the traditional model & Co. will be one of the largest to date, with the fi rm’s portfolio of acquiring large portfolios of funds from sellers and are fi nding valued at around $5bn. A number of secondary players have innovative ways to provide liquidity to the private equity market. shown interest. The past year alone witnessed a number of ‘non-traditional’ secondaries transactions, a sample of which is listed in Fig. 5. 4. Direct Sales of Portfolio Company Interests This shows the fi rm foothold these strategies have in secondary market buyer and sellers’ operations, as they act accordingly to the An alternative for GPs with funds that have exceeded their opportunities that have presented themselves in the ever-evolving lifetime is through direct sales of interests in the fund’s remaining private equity landscape. portfolio companies. Such investments are the speciality of direct

Fig. 5: Recent Examples of Non-Traditional Secondaries Transactions

Buyer Selling Fund/Firm Date Deal Type Deal Description Morgan Stanley bought into Ferrer, Freeman & Co’s FF&C III Morgan Stanley FFC Partners III Sep-13 Fund Restructuring fund in a deal 100% approved by the fund’s existing LPs. An extension to the fund's life was agreed. HarbourVest Partners provided liquidity to around 20 investors Electra European HarbourVest Partners Jan-14 Fund Restructuring in Electra European Fund II. The fund's life was extended by Fund II four years, with allowance for two or three more deals. HarbourVest and Coller Capital bought out Barclays Africa HarbourVest Partners, Absa Capital Private Group's interest in Absa Capital Private Equity Fund I to Dec-13 Spin-out Coller Capital Equity Fund I complete the spin-out of Absa Private Equity, creating Rockwood Private Equity. The energy team of private equity fi rm HM Capital spun-out to form new company Tailwater Capital. The spin-out was HM Capital Mar-13 Spin-out assisted by secondaries fi rm Landmark Partners with the purchase of HM Capital's legacy energy portfolio. Sobera Capital, backed by Unigestion, completed the Unigestion, Sobera BayTech Venture Nov-13 Direct Secondaries acquistion of a portfolio of companies from BayTech Venture Capital Capital Fund I Capital's fi rst fund.

Source: Preqin Secondary Market Monitor

Data Source:

Preqin’s Secondary Market Monitor can be used to access comprehensive information on all aspects of the secondary market. View detailed profi les for 205 potential buyers of fund interests and 309 LPs looking to sell fund interests, as well as 37 secondaries funds currently in market and 231 closed historically.

This vital tool is constantly updated by Preqin’s team of dedicated analysts through direct contact with institutional investors and fund managers around the world.

For more information, or to register for a demonstration, please visit:

www.preqin.com/smm

10 Private Equity Spotlight / March 2014 © 2014 Preqin Ltd. / www.preqin.com Preqin Global Data Coverage As of 1 March 2014

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