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SECONDARIES ROUNDTABLE MEET THE ROUNDTABLE SECONDARIES ROUNDTABLE JOSEPH MARKS CAPITAL DYNAMICS ‘NAV is just a number’ Marks is a managing director and head of secondaries in investment Private Equity International sat down with six industry management in New York. He has 17 years experts in New York to discuss whether the easy money of experience in has already been made in the secondaries market, how private equity and was previously a principal at Coller Capital, where liquidity is affecting the market, and to examine what he was responsible for secondary the remainder of 2015 has in store for the sector. portfolio transactions. Amanda Janis and Chelsea Stevenson report BRIAN MOONEY GREENHILL COGENT Mooney is a managing director in the capital Navigating full pricing, the rise of restruc- an increasing number of buyers and sellers advisory group in Dallas. He has turings and the use of seller financing in entering the market. more than 15 years today’s booming secondaries market were PEI recently hosted a roundtable in New of experience in among the topics debated recently by a York with some of the industry’s thought the secondaries market. Prior to co-founding Greenhill Cogent he was panel of market experts. leaders and veterans to discuss the market’s a member of the investment team at There’s no denying the secondaries latest trends and challenges. The Crossroads Group, which is now market is thriving. Estimates for last year’s part of NB Private Equity Partners/ PEI: All the easy money’s already been Neuberger Berman. closed deals were around the $50 billion- mark, with pricing at an all-time high and made in secondaries, according to a SPONSORED BY CAPITAL DYNAMICS, GREENHILL COGENT, LANDMARK PARTNERS, PANTHEON, PARTNERS GROUP AND SL CAPITAL PARTNERS ›› 30 private equity international may 2015 SECONDARIES ROUNDTABLE Financial Times column last month. uncertainty. So [with] a combination of MEET THE ROUNDTABLE Fighting words or bang-on? visible exits plus being able to project BARRY MILLER Barry Miller: ‘Easy money’ is a broad-based [underlying assets’] future value, I think LANDMARK PARTNERS term. There is probably more competition you can really [take your] pick in today’s Miller is a partner in the today … but the reality is there is a lot more market and find things that appreciate. And private equity group. opportunity as evidenced by unprecedented as I look across returns in the [secondar- He opened Landmark’s New York office in 2013 volumes of assets brought to market. That ies] industry the last five years, there is a after working as the means we can be more selective in the pretty strong track record and that’s been head of private equity transactions we pursue. in a high-priced environment. at the New York City Retirement Systems. He has also worked as a partner at Pomona Capital and spent Rudy Scarpa: There are still inefficiencies in Brian Mooney: Pricing has never been seven years as a senior investment the secondary market. We need to remem- higher in terms of percent of NAV, but manager at AXA Private Equity. ber that we’re buying limited partnership that’s too easy a number to focus on. It’s RUDY SCARPA interests in private funds that are in turn rarely the right way to think about the PANTHEON invested in private companies. While eventu- assets you’re buying or selling. When we’re Scarpa is a partner ally general partners sell those companies at advising someone on the sell side we try on the secondary investment team, their market value to generate good returns, to get them away from focusing on ‘what having joined the firm a portfolio company’s current net asset value percent of NAV am I getting’ toward ‘what in 2007 to open its (NAV) doesn’t always equate to current fair percent of the future value discounted to New York office. He was previously a partner on Coller market value and that translates into market today does the offer price represent?’ Capital’s deal-sourcing team and inefficiencies. As long as inefficiencies per- has also worked at TH Lee Putnam sist, there are opportunities for secondary Miller: It’s a starting point. NAV is just a Ventures, Merrill Lynch and Skadden Arps. buyers to generate attractive returns. number and you start from there – you move forward and you figure out math- ADAM HOWARTH Joseph Marks: Rudy refers to inefficiency; ematically what kind of rate of return PARTNERS GROUP another term might be ‘pockets of value’ you’ll get. Howarth is a managing director who co-heads and I think that whether it’s a deal’s com- the firm’s global private plexity that it gives you an opportunity or Patrick Knechtli: Headline secondary pric- equity secondaries. a smaller without as much fanfare transac- ing reflects mostly the bigger transactions He spent several years in Partners Group’s tion, there are always pockets of value in – the larger portfolios of well-known, Singapore offices the marketplace. There is a certain degree brand name buyout funds that are being before moving back to New York in of randomness in every transaction and not sold. They are often priced fully and in some 2014. He also spent five years as an associate at HarbourVest Partners. everybody can focus on every deal at the cases have leverage applied to them, which same time. again boosts that headline price. [We tend PATRICK KNECHTLI to focus on smaller transactions or lesser- SL CAPITAL PARTNERS Knechtli is a partner PEI: But what about today’s full pricing known managers.] who leads SL’s environment? Surely that’s a challenge. secondaries investment Adam Howarth: It’s really about selecting Howarth: I still think the term ‘full price’ programme in the right assets where you see real future is irrelevant because it goes down to the Edinburgh. He joined the firm in 2009 after value potential. We buy LP interests but cash flows. And if I buy something at what spending nearly eight years focusing really what drives value is the underlying seemed a premium to the reference date, I on private equity secondaries at cash flows. can generate cash flows over a whole period Coller Capital in London. He has also worked in the M&A and capital You also have a lot of liquidity in the – which may be three or four years – that markets advisory group at Dutch bank markets today that you maybe didn’t five are well in excess of what that cash purchase ABN AMRO Group. years ago, when there was a lot more price was. ›› SPONSORED BY CAPITAL DYNAMICS, GREENHILL COGENT, LANDMARK PARTNERS, PANTHEON, PARTNERS GROUP AND SL CAPITAL PARTNERS may 2015 private equity international 31 SECONDARIES ROUNDTABLE Not all LPs or capital commitments are created equally. LPs bring different things to franchises and to sponsors Adam Howarth ›› So we are not as concerned about what the price is vis-a-vis the NAV because that’s so fungible – is it reference date, is it closing date? Historically it’s always been around that reference date NAV that people have benchmarked to, but you can kind of use anything you want to. Mooney: I don’t think all the easy money has been made, but return expectations are just different. Years ago the substantial majority of what was transacting were sell- Miller: That’s the key: they’re looking for primary and co-investment platform to ers who needed liquidity or were getting premium that is a liquidity premium. The position ourselves well in secondary deals. out of private equity. There was a price, challenge [when talking about returns] is the buy side was fairly limited and buyers people always talk about ‘private equity’, but Marks: In our case, we focus on the small-end were targeting returns, for a lower risk it is asset dependent. If you look at private of the market where there are better pockets asset, well above what primary investors equity it is buyout, mezzanine, venture, of value than the larger or broader auction were targeting. That’s changed now, at least growth, U.S., Europe – it is important to channel. That provides interesting options in my opinion, where secondaries are less define what people are talking about. that are often off the radar of larger funds. risky than primaries and now are generally We also leverage our primary platform. underwritten to a lower return expectation PEI: Let’s go back to this notion of ‘pockets than primaries. of value’; what types of deals are you PEI: A year or two ago, it seemed everyone finding most attractive? was talking about ‘zombie’ funds and how PEI: What should return expectations be? Knechtli: Secondary players tend to focus secondaries capital could help solve the Howarth: I think it’s really tough to define. on where they have good knowledge and issue for investors. Today it seems the focus There are so many different strategies, so insights. So for us, we target smaller-cap is less on poorly performing managers many different groups focused on differ- funds that don’t typically trade on the sec- unlikely to raise another fund, and more ent assets, different types of transactions, ondary market very frequently. When they on GPs with decent track records expected different structures, different risk profile do come up, we are usually in a favoured to raise subsequent funds. Whether you underneath there. But clients that we talk position, usually both because of the infor- want to talk about ‘sunset funds’, ‘liquidity to are looking for some sort of premium mation we have on the underlying portfolio, solutions’ or GP-led fund restructurings over the public markets – whether that’s but also the relationship we have with the and recaps, are your firms focused on this 300 or 500 basis points net, I don’t know.

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