Secondaries

“The market has alre­ady seen a lot of acti­vity in the first quar­ter and I believe it will become even more dyna­mic throug­hout the rest of the year. Perso­nally, I expect that 2011 will be a record year in terms of tran­sac­tion volume, proba­bly around €22 billion in 2011, which would repre­sent a 10% increase compared to last year. Other market parti­ci­pants have a simi­lar opti­mi­stic outlook on growth.
 
The market in private equity secon­da­ries in Europe is still some­what behind the US, where it has been around for longer and is more mature. Regu­la­tory drivers such as Basel III and Solvency II are likely to add to the supply of deal­f­low from finan­cial insti­tu­ti­ons wishing to dispose of some of their private equity program­mes and hence we should see some addi­tio­nal attrac­tive invest­ment oppor­tu­ni­ties over and beyond what we call the ‘base’ tran­sac­tion volume for the next years to come.
 
The same drivers hold true for Germany where we have been active since the incep­tion of Green­park over ten years ago and where we have inves­ted 10% of our funds’ capi­tal. I hope we can increase that even further in the future as Germany is a very attrac­tive market which holds serious poten­tial for private equity with its tremen­dously successful Mittel­stand compa­nies. In the past, secon­dary deal­f­low in Germany has been some­what limi­ted but I think 2011 will show substan­ti­ally more acti­vity.
 
I believe the mid-market will conti­nue to provide a very solid risk-return profile for secon­da­ries inves­tors as it less vola­tile, less lever­a­ged, and gene­rally with a good alignment between the gene­ral part­ners who manage the funds and the inves­tors in these funds. It is in this space where we find the most attrac­tive invest­ment oppor­tu­ni­ties. Over­all, and of course I would say this but I do believe that now is a very good time for inves­tors to consider inclu­ding secon­dary funds in their private equity programmes.”

“It means that mana­gers of private equity program­mes and port­fo­lios use the secon­dary market actively to lock in returns, unlock capi­tal to allo­cate else­where, sell down funds that are no longer in the stra­te­gic focus of the port­fo­lio or simply reduce the number of rela­ti­onships. Of the Green­park deal­f­low about 40–50% of all tran­sac­tions that we have seen in the last two years can be clas­si­fied as port­fo­lio manage­ment sales or as sales reflec­ting a stra­te­gic shift in the private equity program­mes that held these posi­ti­ons. At the moment, the secon­da­ries market is the only option for mana­gers wanting to obtain liqui­dity and its ongo­ing deve­lo­p­ment plays a vital role in incre­asing the exit opti­ons for mana­gers who want to divest private equity fund posi­ti­ons or legacy assets. We believe that active manage­ment of private equity program­mes is essen­tial for many inves­tors and that the use of the secon­dary market will increase much further in the future.”

“It has been gene­rally esti­ma­ted that between 2% and 4% of the primary market capi­tal pool is recy­cled in the secon­da­ries market each year, repre­sen­ting what we refer to as the ‘base’ global secon­da­ries deal flow. In addi­tion, deal flow in the secon­da­ries market is curr­ently also driven by deve­lo­p­ments in the world­wide finan­cial markets and chan­ges in the regu­la­tory envi­ron­ment.  For exam­ple, the capi­tal adequacy requi­re­ments of Solvency II and Basel III are placing increased selling pres­sure parti­cu­larly on banks and insu­rance compa­nies, and it follows, ther­e­fore, that the secon­da­ries market will be used as an important instru­ment in active port­fo­lio manage­ment going forward.  Pension funds will see simi­lar regu­la­tion over time and are ther­e­fore also expec­ted to become active parti­ci­pants in this market.
 
On average, accor­ding to Green­park data, banks, corpo­ra­tes and gene­ral part­ners tend to feature most frequently as sellers, making up more than two thirds of our deal­f­low over recent years.  Howe­ver, the exact percen­ta­ges of sellers varies from year to year depen­ding on market circum­s­tances and econo­mic cycles.  In the econo­mic down­turn for exam­ple, liqui­dity requi­re­ments were a primary moti­va­tion for tran­sac­tions on the secon­da­ries market and at that time sellers included a large number of endow­ments, family offices and funds of funds.  Howe­ver, even then, many poten­tial sellers were able to avoid selling in a secon­da­ries market where pricing had fallen to average discounts of 60% of NAV reflec­ting uncer­tainty about both asset perfor­mance and exit timing and value.  The expec­ted major secon­dary sale acti­vity was avoided as a result of a combi­na­tion of govern­ment funded bank bailouts, the absence of capi­tal calls linked to new invest­ments and a subse­quent rise in equi­ties markets.
 
Deal­f­low volume in 2010 equal­led that of 2008 with an esti­ma­ted total of $20bn in comple­ted secon­dary tran­sac­tions and 2011 is predic­ted to be even more active with the higher visi­bi­lity on port­fo­lio perfor­mance and revi­sed net asset value levels.  This impro­ved tran­sac­tion envi­ron­ment has allo­wed sellers to return to the secon­da­ries market prima­rily for stra­te­gic and port­fo­lio manage­ment reasons once again.
 
Risk/return profiles of secon­da­ries funds differ hugely depen­ding on the size of the fund and the secon­dary stra­tegy chosen. Important factors are for exam­ple the type of invest­ments (buyout, venture), the matu­rity of the secon­dary invest­ments (early secon­da­ries versus mature secon­da­ries), focus on tradi­tio­nal fund secon­da­ries or on port­fo­lios of direct company inte­rests, and geogra­phi­cal coverage. At Green­park, we focus on mature, well-diver­si­fied, largely buyout secon­da­ries which offer an excel­lent oppor­tu­nity to enhance returns, reduce risk and bring forward distri­bu­tion cash flows.  These largely funded port­fo­lios allow for better apprai­sal of the assets’ perfor­mance and their exit timing and value.  By focu­sing on mature secon­da­ries we offer our inves­tors an acce­le­ra­ted deploy­ment of capi­tal (resul­ting in less fee drag whilst little capi­tal is deployed) and attrac­tive J‑curve miti­ga­tion.  In addi­tion, our invest­ments have a high port­fo­lio diver­si­fi­ca­tion across geogra­phies, indus­tries, vinta­ges, gene­ral part­ners and funds and given our disci­pli­ned fund and deal sizes most of our invest­ments do not involve an auction of the inte­rests being sold. Most of the time we offer sellers a struc­tu­red solu­tion that can be achie­ved much better in close coope­ra­tion between buyer and seller.”