HEARD ON THE STREET: Private Equity's Recycled Attractions

10th Jun 2010 09:44

By Hester Plumridge A DOW JONES COLUMN In private equity circles, secondhand may be coming into fashion. 'Secondary' buyers acquire private equity commitments from investors seeking to exit illiquid assets early. With valuations appearing to have bottomed out, and a potential glut of secondhand asset sales as banks including Royal Bank of Scotland and Bank of America look to offload private equity portfolios, investors should consider buying used. Typically, the secondary private equity market has been relatively small and illiquid, mainly catering to limited partners looking to offload fund commitments. But with banks under pressure to exit non-core private equity businesses, the market is expanding. Bank of America's April sale of its $1.9 billion fund interests to AXA Private Equity was the largest secondary deal to date. Deal value globally could exceed $20 billion this year, from just $7.5 billion last, fundraising advisers Triago forecasts. The prospect of so many portfolios coming to the market has drawn fresh money into the market. Secondary fund-raising hit at a record high of $23 billion in 2009. Specialists HarbourVest, Partners Group and Goldman Sachs all closed multibillion dollar vehicles. More players are now entering the market: RBS is close to selling a EUR400 million portfolio to Dutch pension fund Alpinvest. Nontraditional buyers now account for around 40% of deals done, more than double a few years ago, according to Triago. That has helped narrow discounts to net asset value, already boosted by the economic and corporate earnings recovery. In the first quarter, the average discount to net asset value on secondary market deals was 17%, versus over 50% last year, according to Preqin. Historically, assets have changed hands at a premium to net asset value. There is also scope for underlying asset values to improve. Despite gains of 20-25% since mid-2009, many primary private equity funds have not recovered the value they lost in 2008. Private equity funds are typically recycled in the secondary market with a four to six year time-lag, according to Permal Capital Management. That suggests assets for sale now should predate the highly-leveraged deals of 2007-2008. Secondary deals coming to market this year might be the right vintage to sample. (Hester Plumridge is a writer for Heard on the Street. She can be reached on +44 20 7842 9267 or [email protected]) TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. (END) Dow Jones Newswires June 10, 2010 04:44 ET (08:44 GMT)