Secondary Pricing AnalysisInterim Update, Summer 2009

Cogent Closes Over $2.5B in Transactions –Less Than 20% Purchased by Secondary Funds

By Colin McGrady, CFABrad Heern

Secondary Pricing Analysis Interim Update, Summer 2009

Executive Summary

The secondary market or private equity has playeda key role in providing liquidity to institutionalinvestors, allowing them to rebalance assetallocations and acting as a source o liquidity.Pricing o private equity in the secondary market ellin concert with other asset classes in 2008, but did itrecover along with the public equity markets in therst hal o 2009? A review o the pricing and trendsin the secondary sales Cogent represented in therst hal o 2009 revealed the ollowing ndings:1. Pricing or all unds was 45.1% o the12/31/08 NAV.2. Pricing strengthened over the hal-year, withbids based o o 12/31/08 NAVs coming inhigher than would be justied by write-downswhen compared to 9/30/08 bids.3. Large amounts o ununded capital had asubstantial eect on pricing, though thedirection o the impact was opposite or buyoutand venture unds.4. 2006 and 2008 vintage unds receivedsurprisingly good pricing, while 2007 undsreceived much worse pricing than anyother vintage.5. Over hal o the high bids were receivedrom non-traditional secondary buyers, whoare approaching the secondary market in anopportunistic manner as a way to improve thereturn proles o their primary portolios.6. The non-traditional buyers were diverse, withpensions, insurance companies, amily oces,endowments, oundations and general partnersall participating in transactions.7. Over 50% by value o the unds transerred in the rst hal o 2009 went to rst-time buyers.8. Market knowledge is more valuable than ever inachieving the optimal valuation and meeting timing constraints in secondary transactions.

Data Sample and Methodology

This study analyzes the bids that Cogent Partnersreceived on a diverse group o more than 200partnership interests marketed rom January through June 2009, representing more than $2.5B in transaction value. The unds marketed represent adiverse range in und types (61% buyout unds, 22%venture unds, and 17% other unds). As always, thebids represent rst-round bids. Consistent with themethodology used in previous pricing studies, incases where bidders submitted a pricing range inlieu o specic numbers, the midpoint o the rangewas used in the analysis. Continuing the trend notedin the second hal o 2008, many binding rst-roundbids were requested or portolios or und assetsmarketed in the rst hal o 2009, whereas rst-round bids had been almost exclusively non-bindingprior to 2008.One positive side eect o increased mediacoverage is an increased interest in buy-sideparticipation in the secondary market. As such,bidders during this period were diverse. While thebidder prole in the data set diers rom that in paststudies, Cogent remains condent that the bidsare indicative o the price that could be achievedor the unds. This condence stems both rom the historic perormance o rst round bids andultimate transaction values rom buyers in Cogent-led transactions, and because this data set containsmore binding rst round bids and bids rom single-stage processes than any previous data set.

Secondary Pricing Analysis Interim Update, Summer 2009

Cogent Closes Over $2.5B in Transactions – Less Than 20% Purchased by Secondary Funds

By Colin McGrady, CFABrad Heern

Secondary Pricing Analysis Interim Update, Summer 2009

Secondary Market Prices Continue 2008 Trend

As the eects o the weakening economy cascaded through the nancials o private equity portoliocompanies, pricing or the unds continued toweaken as a percentage o the stale reported NAVs.For the rst hal o the 2009, the average high bid (thesimple average o the highest individual bid receivedor each asset) across all assets in the sample was39.6% o the NAV o the unds’ most recent nancialstatements, with an average median bid o 35.7% oNAV and an average low bid o 31.6% o NAV (Figure1). This pricing level represents a continuation o thepricing decline or secondary transactions observedin 2008, when pricing ell rom above NAV in 2007 to61.0% in the second hal o 2008. Prices have allen to the lowest levels seen since the publication o this analysis (Figure 2).The decline in pricing is not specic to und types, though venture unds did achieve slightly higherpricing than buyout unds in this sample with anaverage high bid o 39.4% o NAV, an averagemedian bid o 37.7% o NAV and an average low bido 33.9% o NAV. The average high, median and lowbids or buyout unds were 37.7% o NAV, 33.0% oNAV, and 28.8% o NAV, respectively.

Pricing as a Percentage o the Year-End Valuation

While the above analysis is consistent with themethodology used in previous rst-hal pricinganalyses, the volume o prices received early in theyear (prior to the availability o the general partneryear-end valuations) and the level o markdowns taken at the end o 2008 versus previous yearsskews the pricing considerably. This eect can beseen by disaggregating the pricing by the quarterlystatements the unds were priced against. Fundspriced o o the year-end numbers achieved anaverage high bid o 52.4% o NAV, while unds pricedprior to the release o the year-end nancials had

Average HighAverage MedianAverage Low

Fig. 1

Secondary Bid Spreads (H1 2009)

0% Bids High Bids <20% High Bids >60% Highest Bid

% o Funds