Secondaries pricing dips to a five-year low

Pricing ranges from 30-176% NAV; gap between brands and non-brands negligible.

Pricing of limited partnership interests on the secondaries market dipped to its lowest level for five years in H2 2008, with the average high bid falling to just 61% of NAV according to the Winter 2008 Secondary Pricing Analysis Interim Update, produced by secondaries advisory firm Cogent Partners.

The drop mirrors that seen in the first six months of the year, when pricing slid from above NAV to 84.7%. Though these declines are being observed fairly broadly across the industry, pricing can vary wildly and is largely dependent on the underlying assets in a given portfolio. Indeed, 22% of buyout funds priced above 80% of NAV in the second half of 2008, with the highest value received weighing in at 176.3% of NAV. At the other end of the spectrum, 15% of funds received a high bid of 30% or less of NAV. Furthermore, Cogent observed only a modest difference in the value of "brand" funds against "non-brand" funds, with high bids of 63.3% and 60.4% of NAV respectively.

There is also a suggestion that these discounts may not tell the full story, as reported valuations for private equity funds are unrepresentative of their true value. Aside from claims that distributions should be taken into consideration (as they fairly reflect change in fund value) and capital calls disregarded (as the investments are included in NAV), one of the major factors affecting this is seen to be the fee drag, which is felt more strongly as a fund becomes increasingly drawn-down. Indeed, assuming the weighted-average fund has a management fee of 1.5% of committed capital and is 75% drawn-down, the resultant drag reduces NAV by 50 basis points. Cogent figures, adjusted to account for these considerations, suggest that the average private equity buyout fund's assets increased in reported value by 2% since September 2007, against drops of more than 15% on the public markets over the same period.

Despite the fact that many investments are still seen to be performing well, albeit below recent historical averages, it is clear that sponsors would not conduct them in the same way in the current market, primarily due to uncertainties regarding the medium-term outlook. Moreover, if GPs' optimism is to be believed and such transactions continue to perform, debt trading at a discount offers returns in line with expectations on equity investments, and thus the market price for the latter must logically fall to reflect the higher risk.

In this sense, and perhaps counter-intuitively, Cogent argues that current pricing levels can still be seen as fairly attractive to sellers, particularly given the return trade-off as a result of the longer expected timeframe of profit realisations. Indeed, if the decline in public markets is used as a more realistic measure of current value trends and sentiment, by adjusting the most recent valuation of the average fund in line with public stock performance, the high bid average increases to 83.5% of NAV. Furthermore, in comparison to the decline seen in publicly-listed private equity funds the deterioration in value can be viewed as extremely modest, with these vehicles averaging a 70.9% decline in value from September 2007 to November 2008.

Cogent also suggests that some sellers are benefiting from the increased selectiveness of buyers. This has resulted in more buyers involved in individual transactions and thus, a reduction in the number of interests being acquired by each, down from 6.1 in 2007 to 3.7 in H2 2008. Using historical benchmarks, selling in this way rather than to one individual high bidder has been shown to increase.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Industry
• UK / Ireland
• France
• Benelux