Spotlight Private Equity www.preqin.com May 2010 / Volume 6 - Issue 5 Welcome to the latest edition of Private Equity Spotlight, the monthly newsletter from Preqin providing insights into private equity performance, investors and fundraising. Private Equity Spotlight combines information from our online products Performance Analyst, Investor Intelligence, Fund Manager Profi les, Funds in Market, Secondary Market Monitor and Deals Analyst. Secondaries in 2010 Feature Spotlight Fundraising Spotlight page 3 page 13 Secondaries in 2010 This month’s Fundraising Spotlight looks at buyout, venture and cleantech fundraising. There was expectation across the industry that there would be heightened activity on the secondary market in 2009. This month’s Feature Article examines why this never materialized Secondaries Spotlight page 16 and looks at what 2010 has in store for the secondary market. We look at statistics from Preqin’s industry-leading product, Secondary Market Monitor, and uncover the latest secondaries news. Performance Spotlight page 6 Secondaries Funds of Funds Investor Spotlight page 17 This month’s Performance Spotlight looks at private equity secondaries funds. This month’s Investor Spotlight examines investors’ attitudes towards the secondary market. Fund Manager Spotlight page 8 Conferences Spotlight page 19 This month’s Fund Manager Spotlight reveals which US states This month’s Conferences Spotlight includes details of upcoming have the most private equity fi rms and capital. events in the private equity world. Deals Spotlight Investor News page 10 page 21 This month’s Deals Spotlight looks at the latest buyout deals and Preqin’s latest product - Deals Analyst. All the latest news on private equity investors including • Abu Dhabi Investment Authority What would you like to see in Private Equity Spotlight? Email us at: [email protected]. • Franklin Park Venture Fund London: Scotia House, 33 Finsbury Square, London, EC2A 1BB You can now download all the data in +44 (0)20 7065 5100 this month’s Spotlight in Excel. New York: 230 Park Avenue, 10th Floor, New York, NY 10169 +1 212 808 3008 OUT NOW www.preqin.com The 2010 Preqin Follow us on: www.twitter.com/preqin Private Equity Secondaries Review More information available at: Join our group on: search for Preqin www.preqin.com/secondariesreview © 2010 Preqin Ltd. / www.preqin.com DEALS • PERFORMANCE • INVESTORS • FUNDRAISING • FUND MANAGERS >cfYXcgi`mXk\ \hl`kp]le[iX`j`e^ N\_Xm\XjlZZ\jj]lckiXZbi\Zfi[`eiX`j`e^ZXg`kXc]fi gi`mXk\\hl`kpXe[i\Xc\jkXk\Ôidj]ifdXifle[k_\nfic[% FliXY`c`kpkf[`]]\i\ek`Xk\fliZc`\ekj`eX_`^_cpZfdg\k`k`m\ dXib\kXe[flicfe^jkXe[`e^i\cXk`fej_`gjn`k_XZk`m\ `em\jkfij`eEfik_8d\i`ZX#<lifg\#8j`XXe[k_\D`[[c\<Xjk Xi\b\pkfflijlZZ\jj% gifm\ejlZZ\jjgifm\ejlZ N\Xi\gXike\ijn`k_\XZ_f]fliZc`\ekj#_\cg`e^k_\di\XZ_ k_\e\okc\m\c`e]le[iX`j`e^% \\]ÔZ`\ek]ÔZ`\ g\ijfeg\ijfeXc`kpX Zfdd`kd\ekek \og\ik`j\ jkiXk\^`Z \k_`ZXc i\XZ_ `e[\g\e[\eZ\ nnn%Zjgcg%Zfd Efik_8d\i`ZX Fe\>Xcc\i`XKfn\i#(**,,Ef\cIfX[#;XccXj#K\oXj.,)+' AWARDS 2009 "(%0.)%0/'%,/'' <lifg\ >iXe[$Il\(0#()-'EpfeÆJn`kq\icXe[ "+(%))%*-,%+,'' 8j`X **0O`bXe^IfX[#J_Xe^_X`)'''+'Æ:_`eX "/-%)(%,)(*%-0,0 3 ◄ Feature Article May 2010 Private Equity Secondaries: The Market in 2010 Following the onset of the fi nancial crisis, late 2008 and early 2009 bringing them into alignment with other asset classes, thus saw a number of institutional investment portfolios enter a state alleviating the denominator effects for many investors. With of disharmony and distress. With public markets falling, many continued uncertainty surrounding the market, neither buyers nor found themselves over-allocated to private equity as a result of sellers were able to fi nd a centre ground and the market stalled. the denominator effect. The expectation felt across the industry was that this would lead to a period of heightened activity on the 2010: A Potentially Record Year? secondary market, with distressed institutions such as endowment Although the economic outlook has improved since 2009, there funds being forced to offl oad private equity interests where they are still a large number of investors seeking to sell fund interests would no longer be able to meet call-up obligations. However, on the secondaries market. As Fig. 1 shows, our latest research as 2009 unfolded, these expectations failed to materialize in the indicates that 2% of institutional investors are looking to defi nitely market. sell, with a further 11% possibly selling in the next 24 months. This is an increase from last year, due to the lack of activity on the The Bid to NAV Chasm secondary market causing a backlog of potential sellers. As Preqin research conducted at the time revealed, the lack of deal-fl ow was certainly not due to a shortfall in the number of Investors are seeking to exit investments for a number of reasons. potential buyers or sellers in the market. A survey of investors Although the denominator effect is now far less pronounced, showed that 1% were highly likely to be selling fund interests, with capital calls far exceeded distributions from existing investments a further 9% considering a sale – not especially high numbers, but in 2009, and many investors are overcommitted to private equity within the context of a $2.5tn industry, still indicative of a signifi cant as a result – especially those with aggressive overcommitment level of activity. The market was not short on demand either, with strategies. 63% of sellers state liquidity as a driving factor in wishing fundraising by secondary specialists at historic highs, and with a to sell. Other important factors include portfolio rebalancing (40%) number of investors previously focused on primary transactions and exiting poorly performing funds (18%) (Fig. 2). now considering secondaries activities. The number of potential buyers in the market is also high. While The major factor restricting the fl ow of activity was the wide gap the rest of the private equity market had a torrid time in 2009 in between bid prices and fund NAVs. As public equities improved terms of new fundraising, secondaries funds actually had a record dramatically throughout 2009, institutional investors found year, with 19 vehicles reaching a fi nal close with $23bn raised themselves at a reduced level of distress, and consequently many in total. Goldman Sachs closed a $5.5bn fund in April 2009, were less inclined to sell off their private equity investments at which is the biggest dedicated secondaries fund closed to date. such a discount. Private equity fund valuations (running on a Normal institutional investors are also displaying a preference delay to public market investments) saw downward adjustments for secondary transactions, with 6% highly likely to buy, and a Fig. 1: Fig. 2: Likelihood of Institutional Investors Selling Fund Interests on Motivations for Selling Fund Interests on the Secondary the Secondary Market over the Next 24 Months Market 70% 63% 60% 50% 40% 40% 30% 20% 18% 10% 8% 0% Liquidity Portfolio Exit Poor Reduction in Rebalancing Performing Administrative Funds Burden Source: Preqin Source: Preqin © 2010 Preqin Ltd. / www.preqin.com You can now download all the data in this month’s Spotlight in Excel. 4 ◄ Feature Article May 2010 further 24% of those interviewed indicating an active interest in the market. Fig. 3: With an increase in the number of buyers and sellers, activity in Listed Private Equity Discount/Premium by Type 2010 has the potential to exceed that of 2009. However, activity in the market will again be dictated by the ability of buyers and 0 -10 Buyout sellers to reach a consensus on fair pricing. Median -20 -30 The Bid Ask Ratio is Closing -40 Venture Median Fig. 3 shows the discount / premium to fund NAV for listed private -50 equity vehicle pricing. This acts as an excellent proxy for the -60 Fund of level of bids forward by buyers for unlisted vehicles, and is well -70 Funds correlated to the bids being seen on Preqin’s Secondary Market -80 Median Monitor Online marketplace. The graph shows a signifi cant rise -90 in the discount to NAV following the onset of the fi nancial crisis, Apr-2008 Apr-2009 Oct-2008 Oct-2009 Jun-2008 Jun-2009 Feb-2008 Feb-2009 Feb-2010 Dec-2007 Dec-2008 Dec-2009 with an especially big discount increase in the early part of 2009. Aug-2008 Aug-2009 As discussed, this discount proved too great for many sellers, and Source: Preqin prevented the number of transactions from increasing to expected levels. With secondary transactions requiring plenty of negotiation and time, it will still be some time before the market truly explodes into Since mid-2009, prices have been steadily improving, and the action, but we are expecting the latter half of 2010 and especially market is now sitting at just below a 20% discount to NAV. These 2011 to exhibit record levels of activity for the secondaries industry. levels will prove far more palatable for potential sellers, and as the gap continues to close, the number of sellers that will be willing to exit their investments will rise accordingly. Tim Friedman As a result, sellers are currently enthusiastic about the market, with buyers also optimistic towards secondaries. It appears that This article features information take from a viable equilibrium in terms of supply and demand and pricing is The 2010 Preqin Private Equity Secondaries Review. close to being achieved. For more information about this publication, to view sample pages or to order a copy, please visit: Timescale for the Secondaries Boom This potential is already translating into action - Preqin’s Secondary www.preqin.com/secondariesreview Market Monitor has seen a fl urry of activity in recent months, with LPs putting a number of signifi cant portfolios forward for valuation.