Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. Print
October 27, 2008 01:00 AM

Secondary firms suddenly stalled

Busy times just 3 weeks ago come to a halt because of stock market volatility

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Business has stopped dead for secondary private equity managers, who were in the midst of their busiest season just three weeks ago.

    Stock market volatility is making it impossible for managers to price the limited partnership interests and cast-off portfolio companies they want to buy. Indeed, some of the largest private equity managers moved to the sidelines despite a cornucopia of private equity interests up for sale.

    “In the last couple of weeks we could not close one (deal) because of the (market) volatility,” said Byron T. Sheets, general partner at Paul Capital Partners, a San Francisco-based private equity secondary fund management firm.

    Public companies are used as a proxy for private company values, but that can be challenging when the stock market has wide swings in a single day.

    When the markets settle a bit, firms taking a long view of valuations expect to see bargains from the growing array of sellers offloading interests in private equity funds. Troubled banks like Citigroup Inc., Lehman Brothers Holdings Inc. and Wachovia Inc. and insurance companies such as American International Group Inc. — many either merging or being bailed out by governments around the world — are selling off their private equity portfolios to get liquidity.

    Banks invested in private equity funds to get the lending business of their portfolio companies, Mr. Sheets said. “If you wanted to be on the call list of Blackstone, you had to make a pretty big commitment to its latest fund.”

    Banks now are looking in every corner of their balance sheets for liquidity, he said. One side benefit for banks selling illiquid investments like private equity is that taking a loss does not count against them because Wall Street analysts do not include profit and loss of private equity activity, Mr. Sheets said. On the contrary, analysts view these sales as a positive move.

    Banks are also spinning off their in-house private equity teams in sometimes-disguised management buyout deals. These deals have accounted for about 30% of the current deal flow in the secondary markets, Mr. Sheets said. Last year, Bank of America's venture capital team spun off to form Scale Venture Partners, removing the bank from the financial picture. Some deals are disguised so they don't look or feel like a distressed sale, Mr. Sheets said. Some transactions are being structured as joint ventures, where the seller gets a partial payment upfront in exchange for giving the buyer future distributions.

    Another popular strategy used by Paul Capital is paying capital calls for an unfunded portion of the limited partners' commitments in exchange for an ownership interest in the entire portfolio. This eliminates selling the private equity stakes at a discount. The strategy has been popular with public pension funds wanting to reduce the risk from their 2006 and 2007 vintage buyout funds, Mr. Sheets said.

    Sellers now buyers

    Historically, financial institutions have been consistent sellers, but since the first quarter, more pension plans, endowments and foundations are offering private equity interests for sale, said Bob Long, president and chief executive officer of private equity firm Conversus Asset Management LLC, Chicago. They are trying to prune their relationships, seek liquidity and change asset allocations.

    In February, the $197.6 billion California Public Employees’ Retirement System, Sacramento, sold a $189 million private equity portfolio and about $25 million in unfunded commitments. It is continuing to sell off its legacy portfolio of about 40 partnership interests on the secondary market, and is cutting the number of funds in favor of a higher concentration of funds with top-tier firms.

    Also this year, the $34.9 billion endowment of Harvard University, Cambridge, Mass., announced a $1 billion sale of private equity interests in the secondary markets to rebalance its private equity portfolio.

    Many investors do not have capital to invest because the plummeting stock market has made them overallocated to private equity and real estate. But they need capital to invest in new private equity funds, distressed debt and mezzanine because they think they will reap large windfalls from the mayhem in the markets, said Dayton Carr, president and managing director at VCFA Group, New York, a private equity firm specializing in the secondary markets.

    Rather than miss out on investment opportunities, these institutions would rather sell at a discount in the secondary market their interests in what they believe will be underperforming funds, he said.

    “Some large institutions are bumping up against a liquidity cap,” he said. “Capital calls are continuing, but there are no distributions.”

    Another issue is the consensus that venture capital and leveraged buyout returns will be down because of high prices paid for investments in companies made in the go-go days, Mr. Carr said.

    In the first half of 2008, 22% of institutional investors indicated they sold private equity interests on the secondary markets, while 35% bought interests, according to the Global Private Equity Barometer, a semiannual survey of private equity limited partners by Coller Capital Ltd., London. Limited partners said two top reasons for selling stakes over the next couple of years are to refocus capital on best-performing private equity funds and to increase liquidity, according to the survey.

    But investors will have to accept prices lower than they would have gotten a year ago.

    “Discounts are generally the rule, as opposed to last year when the big funds were buying up,” Mr. Carr said. Secondary investors have to take into account that they will have to own private equity stakes longer, reducing returns. But investors won't be paying fees on capital their general partners have been unable to invest.

    “I'm surprised that institutions have not been pressuring leveraged buyout (managers) to reduce fees,” Mr. Carr said.

    Low expectations

    Return expectations are low for multibillion-dollar funds raised during the heady private equity boom times. These days, stakes in megabuyout funds raised over the last two years are flowing into the secondary market.

    “The market has frowned on 2006/2007 megabuyouts and there is a fair amount for sale,” said Mr. Long of Conversus.

    But some secondary market fund managers see a buying opportunity. “Our belief is the market has undervalued the cheap and flexible debt packages those funds were able to access, which will be a significant benefit to the general partners going forward. There is enormous option value in a long-term capital structure unconstrained by covenants,” Mr. Long said. “We think the pricing is very interesting today and will get even more attractive in the first quarter.”

    But secondary private equity investors differ whether the market is heading for a peak in the fourth quarter or if low volume and prices of private equity interests will continue to persist into the first quarter of 2009.

    A number of large players have raised double-digit secondary funds and more managers are set to close megasecondary funds within the next couple of quarters, sources say. The gush of capital might adjust prices on the secondary markets upward.

    “Supply has increased, and we believe it will further increase,” Mr. Long said. “We believe there will be more volume and more motivation by the sellers leading to better pricing.”

    Contact Arleen Jacobius at [email protected]

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Targeting millennials: Author, niece put his latest book to music
    Targeting millennials: Author, niece put his latest book to music
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    Are Factors a Thing of the Past?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing