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The Diversification of Secondaries Transactions Download Data 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 The Diversification of Secondaries Transactions With the continued evolution of the already complex private equity 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, Lexington 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 Partners Group 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.
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