Coller's Tim Jones predicts choppy waters ahead

Alice Murray
12 December 2014

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unquote” catches up with Tim Jones, who was named CEO of Coller Capital in March, to discuss the increasingly competitive secondaries market and his outlook for 2015.

Alice Murray: Where are the bulk of secondary opportunities coming from in the current market?

Tim Jones: The market has evolved into two main types of seller.
First, tactical sellers - investors using the secondaries market to manage the shape and composition of their portfolios. They sell assets to adjust their exposure by manager, by vintage year, or by geography, but they sell only when the price is right.

Second, strategic sellers - investors who decide to sell in response to important changes in their business strategy or environment. In recent times, the majority of strategic sellers have been financial institutions facing regulatory or balance sheets pressure. Banks, in particular, have historically been major investors in the asset class - and the biggest group of private equity investors in Europe - and they are likely to continue as an important source of secondary market transactions for some years.

The volume of tactical deals in particular has been increasing as prices have become fuller. Only two years ago, portfolios were selling at a 20% discount to NAV, but within the last month we have seen an instance of a 6% premium being paid. This kind of pricing will drive lots of additional dealflow from pension plans - especially the large US plans, which have typically been big tactical sellers.

Another growing part of the market focuses on the very large pool of private equity funds raised during the boom years of 2005-2008 - funds that usually acquired assets at high prices. They are now ageing and much of their NAV has not been exited, which means their investors' returns are suffering; the median IRR for funds of these vintages is around 10%.

The secondaries market is providing investors in these funds with the option to take cash out or to remain invested in the fund by supporting a fund extension with modified terms - a transaction that is usually called a GP restructuring. These deals are very complex since they depend on creating a win-win solution for multiple parties. This part of the market is growing not only in size but in quality; its focus has shifted from third-tier GPs to GPs at the top of the second tier, simply because there is so much capital locked up in these funds.

AM: You mentioned higher pricing. What impact is that having on the secondaries market?

TJ: The main driver of higher pricing is the macro situation - an environment in which the US is seeing strong growth, and Europe is essentially flat. Another factor is the volume of secondary funds raised, and the fact that some LPs are now buying secondary stakes directly.

Exits from portfolios of LP positions bought on the secondary market have been good recently, and a fair volume of capital is therefore chasing these transactions.

The current pricing situation will change, of course. As soon as we see a correction in equity markets, discounts will be back.

AM: Do you see online ‘match-making' platforms as a threat?

TJ: Online platforms can take a number of forms. The third-party match-making platforms are more focused on retail and smaller deals, but they are probably no more efficient than calling up a broker. A number of big private equity firms are also now setting up their own matching services, where investors can post what they want to sell and the firm will find a buyer.

On the whole though, neither online platforms nor GPs offering their LPs liquidity directly are a threat to what we do.

AM: What will be the biggest challenges and opportunities facing the secondary market in 2015?

TJ: The challenge for 2015 will be selecting opportunities in a highly-priced environment. We do this ourselves by being as flexible as possible in how and what we buy, and by having the expertise and staying power to deal with complex transactions.

I have no doubt there will be a market correction at some point in 2015 or 2016 - driven either by geopolitical strife or by fractures in the global economy. Either way, there is likely to be a period of choppy water - which means investors need to be careful in pricing equity.

A lot of US-based funds will focus capital on the US in preference to Europe, and I think it should be possible to buy well in Europe as a result - as long as you have enough local savvy to understand where the pockets of real opportunity are.