Q&A: Hungry for secondaries

In the midst of the financial crisis many expected a tsunami of secondaries transactions, yet it seemed to be more talk than action. How did you perceive the secondaries market in 2009?
I would agree that secondaries transaction volumes in 2009 didn't measure up to the frothy expectations which many players had. That said, we did see a number of instances of distressed selling, particularly with sector-focused funds.

How do you think this will change in 2010?
We have already seen several signs of narrowing bid-ask spreads this year. I think the smaller spreads are partly due to the recovery in the equity markets and partly due to more realistic expectations from both buyers and sellers in the secondary market. After the "secondaries bubble" of 2006-2007, when sellers often demanded a premium to NAV, and then the financial crisis of 2008-2009, when buyers generally expected deep discounts, I think both buyers and sellers of PE fund interests are returning to a more historically normal situation where PE fund interests are generally exchanged at moderate discounts to NAV.

Of the transactions that did go through many traded at large discounts, was this your impression and how do you see pricing of secondaries develop over the next 12 months?
There were definitely many cases of transactions being done at huge discounts last year, although my experience was that many of the "deep discount deals" involved funds which had called in much less than 50% of their committed capital. There is a major difference between a 2007 vintage fund with 20% of its capital called being sold at an 80% discount to NAV versus a 2003 vintage fund with essentially no uncalled capital being sold at the same percentage discount. Going forward, we expect secondaries to transact on average at moderate discounts to NAV.

In your experience, which LPs are more likely to sell? And is there a particular type of GP affected?
In the Nordic region, our experience is that it's difficult to make generalisations regarding which types of LPs are more likely to sell. For example, we have had many discussions regarding potential transactions with both large institutional investors and smaller family offices, as well as with both Nordic and non-Nordic investors. Our experience is that there are a variety of reasons that may motivate an LP to consider selling fund interests, such as a wish or need to exit the asset class, financial distress, a new CIO or CFO, or a desire to free up capital to invest in other funds. These motivations are not specific to a particular type of LP. In our view, it's similarly difficult to generalise regarding GPs.

Is the Nordic market different from secondaries market in a wider European context and, if yes, how?
In my view, the major difference in the Nordic region is that there are very few larger private equity investors in the region who have reached their maximum private equity allocations. This has two important implications for the secondaries market: Firstly, the "denominator effect" hasn't been a big factor motivating secondary sales here in the way it has been in certain other European PE markets; and secondly, private equity fund portfolio optimisation and "fine-tuning" in terms of vintage diversification, sector diversification, cap focus and so on, isn't as much of an issue for private equity investors here (yet) as it is in certain other European markets.

 

 

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