Q&A: Secondary chances

Having just reached a first close of your secondaries fund on EUR 135m, do you think the fundraising market is improving?

The fundraising environment is still difficult, but there are a few successful closes happening. There has been a clear flight to quality, with LPs now investing in funds with good historical performance from GPs that have stuck to their core strategy. Secondaries as a segment is currently very attractive to LPs and we are targeting smaller transactions, so we benefit from not competing with the large funds that were also closed.


The deluge of secondaries that was expected last year hasn’t materialised. Will there be any significant pick up in 2010?

Since some of the reasons that held back the secondary market are now out of the picture, we do expect a significant pick-up in the next 24-36 months. It is now easier to determine the value of an asset and to project where the market is going. While discounts are no longer at 60 or 70% there are still discounts of 25-30% of NAV available, meaning prices remain attractive to GPs while ensuring vendors are willing to sell. You have to remember that these discounts are available on portfolios that are valued 20-30% lower than 9-12 months ago, so the absolute price paid for a portfolio might not have changed substantially. 


There was much talk last year of a strain on LP/GP relationships – has there been any improvement in this sense?

The relationship between LPs and GPs is under more of a strain than ever. 2008/2009 was clearly a difficult environment, during which many GPs acted exemplary, took the right actions and provided as much transparency as LPs desired. Other GPs found it more difficult and in some cases there were conflicts of interest when the GP’s best interest wasn’t the same as their LPs’. There are many small (and sometimes not so small) conflicts that continue to create friction: such as the key man clauses; fund extensions; what to do when the fund only reaches a fraction of its originally envisioned size; and how to pay GPs if the fund will not generate carry. We’ve never been so busy working on behalf of our investors’ interests as at the moment.

How big of an issue for the industry is the ‘brain drain’ as senior team members of private equity firms opt for early retirement rather than see their old funds through with little chance of earning carry?

We’ve already seen it in the cases of Alchemy and Quadrangle, where firm founders leave to pursue other avenues. I expect this trend to continue over the next one to two years, as firm founders phase out of their businesses. Of course, this is also part of a generational change in the industry and can be a good thing. The core question is: in what state is the portfolio when the founder leaves? If the portfolio is in reasonable shape, such generational change-overs are much easier to manage.

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