The debt crisis and a melting economy might be sinking direct private equity returns and flooding banks' balance sheets, but the secondary markets are surging ahead.
The secondary market has grown to an estimated $63 billion globally in 2007, up from about $4.4 billion in 1997. Because many transactions are private, the size might be higher, said Stephen J. Moseley, president of StepStone Group LLC, a private equity consulting firm in La Jolla, Calif. The market has been growing about $10 billion to $12 billion annually.
The secondary market started to flourish in October, when banks and other financial institutions began shedding their private equity interests.
Banks got into big commitments with megabuyout funds to get their leveraged lending business, said David de Weese, partner in the New York office of Paul Capital Partners, a direct and secondary private equity investment firm. Bank executives didn't think they would get the lending business if they didn't make fund commitments, Mr. de Weese said.
Banks also need cash, but private equity commitments tie up that cash, said Bob Long, chief executive officer of Conversus Asset Management LLC, a Chicago private equity shop that was among five to purchase private equity interests from the $240.6 billion California Public Employees' Retirement System, Sacramento.
Almost every big bank on Wall Street has more private equity exposure than banking executives are comfortable with because banking regulations require them to have access to cash and look hard at how they manage their risk exposure. Private equity is an expensive asset for banks to keep on their balance sheets because private equity commitments tie up cash, explained Elly Livingstone, partner, in the London office of Pantheon Ventures, a private equity and secondary market investment firm.