Updated with correction
The private equity secondary market is starting to heat up, with price increases prompting some investors to consider strategic sales and others to look at buying.
Prices have been rising for the last nine to 12 months to about 90% of face value. Industry insiders say they expect prices to level off because few expect prices of private equity interests on the secondary market to exceed par or face value.
Among those looking to sell some of their private equity holdings are the $33 billion Illinois Teachers' Retirement System, Springfield, and C$46.3 billion (US$44.6 billion) Public Sector Pension Investment Board, Montreal.
Buyers want to maximize the returns of their private equity portfolios are looking to buy portfolios in the market. The idea is to buy into top-performing funds that are only a year or two old and are not fully committed, industry executives say. This allows them to reap future returns and miss out on the early part of a fund's life, before it makes money. Among the potential buyers are the Illinois Teachers system and the $332 billion China Investment Corp., Beijing.
“Pricing has certainly improved in the last six to 12 months, but it has leveled off,” said Brian Talbot, managing director and global head of secondary private equity at Neuberger Berman LLC, New York. “It is our view that, if anything, we will see a pickup in transaction volume now that pricing has improved.”
Indeed, in the first half of the year, prices for buyout funds on the secondary private equity market rose to 86.4% of net asset value from 68.9% in the second half of 2009, according to a study by Cogent Partners, a Dallas-based investment bank serving the secondary market.
A year earlier, prices on the secondary market had fallen precipitously, with the value of private equity fund interests sold on the secondary market falling to an average high bid of 39.6% of net asset value in the first half of 2009, from 61% in the second half of 2008, according to Cogent.
The market has doubled since last year, said Scott Meyers, Cogent managing director and co-founder. Cogent estimates that global transactions will total $15 billion to $20 billion and possibly more this year.
“In the first half of this year, we saw a record amount of transactions,” Mr. Talbot said.
Kicking off the deal flow this year was AXA Private Equity's April purchase of a $1.9 billion portfolio of limited partnership interests in private equity funds from Bank of America. This was the largest secondary private equity transaction in two years.