A new dimension

Emanuel Eftimiu
09 November 2010

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Although the secondaries market has increased substantially in size over the past few years, little progress has been achieved in making transaction processes more efficient and transparent. This could be about to change as Emanuel Eftimiu finds out.

The maturing private equity industry is facing a number of challenges. While the economic downturn has put substantial pressure on portfolio companies, scarcity of leverage, new regulation and changing LP appetite are adding to the strain.

The challenge for the industry now is to adapt to new conditions and continue to evolve. It is showing every sign of doing so. Secondaries, and the liquidity they provide LPs, is just one of many adaptations.

Previously seen as an avenue of last resort, the secondaries market has grown substantially in size over the past few years and, judging by the number of secondaries funds raised in recent times, increasingly attractive to investors.

An increasing number of fund interests are changing hands in today's market, but it is remarkable how little transparency the transaction process offers to the market observer. Buying and selling fund interests is a complex and sophisticated process, involving in depth due diligence and most of the time greatly differing views on valuations.

However, at its essence the process is no more complicated than trading stakes in funds. One might argue that it could, and maybe should, therefore be facilitated by some form of exchange platform. Indeed, such portals have been set up before, with US-based NYPPEX and secondmarket the prominent examples, although neither has yet managed to establish itself as an all-encompassing secondaries trading platform.

The latest venture challenging the current market structure and looking to make secondaries transactions more efficient is Secondcap. Its platform, SecondaryNet is introducing a new approach by tackling the workflow of the transaction process. "No one has dealt with the plumbing before," states Martin Graham, chairman of Secondcap, arguing that the average time it takes to complete a plain vanilla transaction at the moment would be reduced by up to 40% by making the process more efficient.

"Unlocking the growth potential of the secondaries fund market is our main objective," stresses Secondcap CEO François Gamblin, formerly a partner at fund-of-funds Fondinvest Capital in Paris. To achieve this, the platform not only facilitates the transaction process but crucially aims to provide sellers with access to the greatest possible universe of genuinely interested buyers - the members of the platform. "Buyers are not only secondary specialists but also family offices from around the globe that would like to purchase interests but are currently idle," notes Gamblin.

The start-up aims to have around 400 listed buyers by end of next year, a pool that would be automatically matched with a fund interest registered on the platform by an adviser or direct seller. Incidentally, this process also ensures that sellers are fulfilling their fiduciary duty to attain the best possible price for their asset - a sometimes difficult undertaking given the currently opaque market.

Additionally, the process envisioned by Secondcap has an added benefit for GPs, who usually take a back seat when investors in their fund are looking to sell their interest. In fact, here the GP is asked for pre-approval of the short list of interested buyers and is therefore able to strategically select LPs and diversify its investor base, which can be a great advantage for future fundraisings.

While the aim is to provide members with access to greater dealflow and selection, the platform is enticing sellers to list interests by offering these so called "liquidity providers" a fee share payment upon completion.

"In the end, a growing secondary market can only benefit the primary market because today's LPs are more willing to invest if they know that they can exit when necessary and are not tied up in an illiquid asset class," For liquidity searching LPs, this would be quite a good prospect indeed, which may ultimately benefit GPs.