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SCALNAR S P A R T E R
Arnaud van Tichelen
the marketplace for alternative investments
ICADE, Faculty Advisor: Rocío Sáenz-Díez London, September 2010
© 2010 by Arnaud van Tichelen. All rights reserved. This work is registered with the UK Copyright Service: Registration No: 96521. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including notice is given to the source.
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CONTRIBUTORS OF THE STUDY1
ABOUT THE AUTHOR Arnaud van Tichelen recently graduated with distinction from ICADE’s international business administration program (E‐4). During ICADE, Arnaud worked 6 months at UBS within the M&A team and 6 months at Comgest (asset management) as an equity analyst. He currently works in the Investment Banking Division (Consumer products and retail) of UBS in London. He can be contacted at firstname.lastname@example.org
Three other investment funds shared their views but requested to remain anonymous. The author is grateful to Professor Rocío Sáenz‐Díez, to Trevor Giles from Caracalla Capital and to Nick Hatch from Scalar Partners for their support in this work but also to the investment professionals who contributed to this study for their precious time and valuable insight.
W e h op e in ves tors w il l le arn an d pr ofi t from th is work. Trevor S. c ana da 1 .ca .3 54 . Giles CMA CFA Managing Director C ARACALLA capital sourcing corporate finance gp / lp secondary for the canadian market to c ontac t us va ncou ver . W e b e li e ve i t pro v i des an e xc elle n t pr imer to the p riva te e qu i ty s eco nda r y mark et along with impor ta n t m ar k e t h is to r y a nd v alu a ti on t ec hn iq ues .W e a r e pro ud to h av e as s is t ed w i th th is s tud y .8 77 . br itish c olu mb ia .ca r aca l la .4 422 o n the w eb w w w .
California 94109 +1 (415) 283‐3280 secondaries@scalarpartners. 5 Floor San Francisco. screening. Utah 84095 +1 (877) 872‐3643 .com www. monitoring and I reporting. River Front Parkway. due diligence.scalarpartners. Suite 300 Salt Lake City. fund accounting. and secondary advisory Feel free to contact us: San Francisco Office th 580 California Street.com/secondaries Salt Lake City Office 10813 S. We leverage our network and expertise to help limited partners achieve their private equity allocation objectives including: venture and private equity fund I sourcing.
empirical data clearly shows that a bottom-up valuation is crucially important in determining the value of an asset in the secondary market. LP. carried interest. valuation.-3- ABSTRACT During the current liquidity crisis. Although the top-down method is helpful in determining the value of a potential secondary. Investors need to be aware of the challenges and dynamics of this fast evolving market and to carefully analyze each potential sourced opportunity. waterfall. This research paper attempts to analyze the characteristics of the Private Equity secondary market. . However opportunities on the market are mirrored by significant challenges. selling limited partnership capital commitments. GP. the market is still inherently inefficient and pricing tends to vary widely among bidders. Near-term and long-term factors are driving a fast growing market which many expect will grow about 16% annually (CAGR) in the next five years. Keywords: Private Equity. transaction volume for secondaries is near an all-time high which generates further liquidity and benefits the asset class as a whole. secondaries. liquidity. unfunded. However. fundraising. the Private Equity industry has been reshaped and experienced a significant increase in the level of interest and activity in the secondary market. secondary fund. despite its growth. Currently. This analysis is based on more than 25 interviews conducted with expert participants in secondaries. Furthermore it analyses the valuation in the market and provides an actual valuation of a real secondary investment opportunity supported by the development of a secondary valuation model. secondary market.
.................. 29 1................................ 18 1.......................................4.... 15 CHARACTERISTICS OF THE PRIVATE EQUITY SECONDARY MARKET ....................................4.....................3....................................................................................... 23 1........................ The secondary market participants .........4.................... 21 1....1 The size of the primary market .............................. Different reasons to resort to the market ..3................................................... 23 1................................ 40 ....................................................................2.................... IV TABLE OF FIGURES ................................................................................. 33 1.............................................2 An illiquid investment ...............................................................................................................................................................................1............................................ II ABSTRACT CONTENTS ...1.....1...............4.........................4 Other emerging participants: the private marketplaces 38 1..............2... 18 1.... II.................................................................. III ............. IX LIST OF TABLES .... 18 Theoretical framework ................1 The advisers .....................................................................3 The buyers.......................... 19 1........XII I..................2................4..................................................................................... 1............................................. 19 1...... 35 1............ 18 1........................................................... DESCRIPTION OF THE MARKET ..............2 The size of the secondary market ............................3........................................ 29 1...2 Reasons that motivate the buyers................. XI ABBREVIATIONS AND SYMBOLS............................................................. INTRODUCTION..........................1 Reasons that motivate the sellers ................-4- CONTENTS CONTRIBUTORS OF THE STUDY..... Volumes of investment in Private Equity..............................................................................................2 The sellers ..........................................................................................5................................1 Private Equity basics .......... 19 1........................................ 26 1............................................................................... History ...........
...........2.......5 Total return Swaps .......... THE TRANSACTIONS ON THE MARKET: DESCRIPTION OF THE DIFFERENT STRUCTURES AND SALE PROCESSES ..2.....3........ 56 2........... 55 2.. 57 2...............................2 Strip Sale ........................................ 53 2..........................................8 Spin-out ..........2.................................................. 46 2. 43 2. 46 2............... 59 3...1..............1 The Consent of the GP ........................ 3.........................3 Open auction ................1.................................7 Securitisation of the unfunded ......3........2............................1.....................................2....................................................... The execution of the transaction ....................... 56 2......2 Direct sale ... 51 2.....5...............................................5 Payment of costs incurred by the transaction ............3..........2 Pre-emption rights: Right of First Refusal (ROFR).......... 46 2.................................. The different sale processes ........ Different types of transactions .... 41 1............................ Different sale structures ..................................................1................................................................................... 58 3................................1... 57 2................4 Targeted auction ..................................................................................9 Tail-end .... 46 2............................................... 47 2............. 42 1....................... 58 Legal considerations in the revision of the LPA ..... 54 2.........................................................................3 The credit crunch (July 2007-2009) ......2......3 Legal reporting requirements ... 59 3... 50 2...........................................1 The beginning of the market (1982-2002)........-5- 1....................................2.................1 Sale of limited partnership interests ...5........... 55 2............................... 49 2........2 The growth of the market (2003-2007) ......................1. 59 3..................................................3 Stapled Secondary ................ 58 3............................................................................... 3.........3.2...4 Sale notification requirements ...............4 Structured secondary sale .......... 56 2....... 54 2..................................4............1 GP option: arrange a sale through the manager .......6 Securitisation: CFOs....................... 50 2...........................................................2......................1 Straight sale ............5.............................................2...........2 Exclusive sale with a secondary buyer ...............................................................................3........................1.............................. 59 ..........2.... 59 3................ Legal considerations in the negotiation of the Purchase and Sale Agreement .............1.......1............... 57 LEGAL AND TAX CONSIDERATIONS ......
..1.........5 Indemnifications .............................................3 An increasing pressure on the investors: fall in the distributions combined with an increase in the capital calls ..1................................................ Future growth catalysts ............... 66 4....1 General trend ........................................ 64 4.......................... 60 3.... 66 4................................2....... 62 4..................1 Secondary market projections model .........4 The improving economic outlook ..-6- 3........................... 73 4............3 Secondary market transaction volume: 2010-2014E ... 72 4...........2. 76 Transactions: historical valuation ....................2.................... 61 3..........................1.....................................6 A market that is becoming a more important asset class for investors ......................................................... III...................... 79 ..................... 78 1.......................3 Clawback provisions ........3 The valuation depends on the funding ratio ...........2.1......................................................................................... 64 4............................7 Stapled transaction clauses .........1.......1 The contingent conditions ......1 The “denominator effect” .....2...... 60 3..........2...... 71 4......................................2 The valuation depends on the type of asset ......... 74 VALUATION IN THE PRIVATE EQUITY SECONDARY MARKET 76 HISTORICAL MARKET VALUATIONS ..........6 Joint liability: French legal framework ..................................................1......2 The new requirements of the financial institutions....... 76 1....................................2 Historical relationship between the secondary base and the volume in the secondary market .......................... 76 1.....................1 Taxation of Private Equity funds ..3........................................................................................3...........2...................... 60 3............. Tax considerations ......2 Material Adverse Change clauses ................1.........................................................2 The United States: the 2% law ....2........ 1................2..............................3....2..............5 The bid offer spread is reduced ...................................2......... 68 4...............1..........3..........2... 61 3........................... 62 4.......... 69 4........ 61 3......................... 61 3...............................2................................... THE FUTURE OF THE MARKET ........................... 60 3................ Ever more structured operations......2.............4 Threshold funds ....................... 62 Empirical demonstration: The primary market drives the secondary .... 1............... 61 3.............. 4...... 63 4............................................................
...........................................1............................2....2.. 102 3.......2 Comparable transactions method ...........3 Adding of the cash flows in the waterfall of the fund ...........................................................2....................................... 95 Bottom-up method: valuation using the model .............. REAL WORLD VALUATION: EMPIRICAL CONTRAST OF THE TWO METHODS .. 80 1....2............3 Limits of comparison with the Private Equity secondary market ..................... 89 2..............5 Aggregate the cash flows in the fund’s waterfall..........1 Introduce the fund’s financial data and growth estimates96 3..........4 The valuation depends on the vintage year of the fund ...-7- 1.....2 The concept of NAV is subjective .. 81 1............................... 83 2............2....4 Determine a timing of capital calls/distributions........2.................................. 90 2.................7 Sensitivity valuation analysis ............... 85 Top-down method............2... 95 Top-down method: market valuation ............................ 106 3...108 3............... 87 2........................ Listed Private Equity funds ........ 93 2................ 87 2...........2......3.3 Project the unfunded.3....2 Historical trading: a proxy towards the valuation in the secondary market .........................1...... 3...........2 Valuing the underlying asset.....2........ 108 ....................2..........................1 Comparison of the results ...2................................... 3................... 85 2.... 85 2................. 86 2..............................................................3.................................2...... 90 2.1.....................1 The transaction or trading value/NAV ratio ................. 2......................... 81 1.....2...........1..................... 86 2.......................................... Comparison of the results: explanation of the difference..........3 The valuation method by the trading multiples ......... 94 3.............................2..............4 Determination and sensitisation of the price of the limited partnership interest according to different scenarios ...... 96 3.......1 Concept .....................1..............2.. 108 3....... 82 1...............6 Discount the cash flows by the cost of capital ........3...............................2 The analysis and the valuation of the portfolio companies99 3............................................... 86 2.3 Each asset is different ....................2....................... 108 3...........................................2.......... HOW TO THEORETICALLY VALUE THIS ASSET....1 Structure of the bottom-up valuation method of a fund’s interest.1...... Bottom-up method: the valuation model ........................
................................................... GLOSSARY The future: growth and sophistication ...................................114 1........................................................... 123 REPORTS ......................................................3............................. 109 3...........................................................5 A buyers’ market... 3................ 114 Analysis of the secondary market: an opportunity for the Private Equity industry............................. 129 .....................................118 REFERENCES .................................131 ...3................6 Key valuation method: bottom-up ...............................................................4 The lag of the NAV .....................................................3............ 110 3............................114 CONCLUSIONS ...................... 1........................123 1............................................................................................. 2...................................................................................................... APPENDIX BOOKS ............................. CONCLUSIONS ....2.................................................................................................. 1......................... 127 DATABASES .....114 Valuation in the secondary market: trend and method ........................................... 4........116 FUTURE RESEARCH .............................................. 117 ................1....... 112 IV.....................................................3..-8- 3............................................................................................................................................. 123 ARTICLES .......................................... 2............................................................................... 1....................................
.................................... 44 Figure 18: Proportion of investors who ruled out transactions in 2008 because of pricing concerns ................................................. 21 Figure 5: Geographical distribution of the transactions .................. 38 Figure 15: History of the Private Equity secondary market ............ 48 Figure 22: Comparison of the characteristics of the different sale structures ...... 46 Figure 20: Transaction volume breakdown – (Limited partnership interest and Direct sale) (2007 to 2009) ........................................ 27 Figure 10: The “J-Curve”...-9- TABLE OF FIGURES Figure 1: Structure of the study ................................. 49 Figure 23: Traditional sale structure: straight sale of a limited partnership interest ...................H1 09). 40 Figure 16: The beginning of the market (1982-2002) ....................................................................... 42 Figure 17: Changes to LPs’ exposure to secondary funds over the years 2008-2009 ........................................ 36 Figure 14: Non-traditional buyer types (H1 09) ............................................... 29 Figure 12: Breakdown by seller type in the secondary market (2008 vs............................................................................................ median and bottom IRR quartiles (by vintage year) ............................................................................................ 50 Figure 24: Structure of a stapled secondary sale of a portfolio of limited partnership interests ................................................................................................................................................................................................... 18 Figure 3: Raised capital in the primary market ($ billions) .................................... 47 Figure 21: Different sale structures in the secondary market ..................... 22 Figure 6: Volume raised by secondary Private Equity funds ($ billions) ............................................................... 20 Figure 4: Transaction volume in the secondary market ($ billions)............. 16 Figure 2: Different Private Equity styles................................................................................................................... 52 ............................................... 25 Figure 8: Reasons for resorting to the secondary market in the next two years (2010-2011) 26 Figure 9: Secondary funds .......... 51 Figure 25: Structured joint-venture sale of a portfolio of limited partnership interests ....................................Top...................... 28 Figure 11: Importance of the secondary market to investors’ Private Equity strategies ... 33 Figure 13: Buyer types (by transaction volume ...................................................................................................................... 45 Figure 19: Two types of secondary transactions: sale of limited partnership interest and direct sale .. 23 Figure 7: Reasons that motivate the sellers in the market (2007/2008/2009) ................................ 2009).....................................................................................................................
....................................................................................... 78 Figure 40: Historical valuation of the best bids received for each fund type (% of the NAV) ......... 67 Figure 34: Distributions as a % of NAV ........... 87 Figure 46: Dry powder in the secondary market in 2010 ($ billions).......................................... 64 Figure 31: Estimates of the secondary market transaction volume according to the historical relationship ($ billions) ..... 70 Figure 35: Anticipated changes in capital calls in the next 12 months ................................... 71 Figure 36: Timing of the tightening of the bid/offer spread .................................................................................................................. 110 Figure 47: Estimate of the dry powder in the secondary market in 2011 ($ billions) ....... 77 Figure 39: Value of the best bid in comparison with the total exposure to the asset (NAV + unfunded) ........................................................................................................................... 83 Figure 44: Two valuation methods of the secondary assets........... 82 Figure 43: Comparison between trading of listed Private Equity funds and bids received in the secondary market ..................................................................................................... 65 Figure 32: LPs’ anticipated level of Private Equity commitments at the end of 2010........................................... 54 Figure 29: Comparison of the characteristics of the different sale processes ...................................... 54 Figure 28: Securitisation of the unfunded ....................................................................................................... 81 Figure 42: Historical trading of the listed Private Equity funds – Premium / (discount) with its NAV ....... 74 Figure 38: Secondary bids over time (as a % of last fund’s NAV) ..................................................................................................................................... 53 Figure 27: Securitisation by means of CFOs ........................................................10 - Figure 26: Total return swaps for a portfolio of limited partnership interests .......... 79 Figure 41: Valuation according to the vintage year of the fund (H1 2009) in % of its NAV ............................. 85 Figure 45: Structure of the bottom-up valuation method ................................................................................................................................ 67 Figure 33: Plans to address the over allocation issue ... 111 ............................................. 73 Figure 37: Anticipated changes to LP’s exposure to secondary funds over 2010-2011 ........... 56 Figure 30: Secondary base (in bn$) .............................................................
......................................................................................................................................................... 31 Table 2: Legal advisers on the secondary market ...................................................................................................................................................... 80 Table 7: Projection multiples of the unfunded according to the quality of the management team ............................ 104 Table 18: Determination of the returns of the secondary investor according to the acquisition price .............................................................................................. 37 Table 4: Distribution of the transaction probabilities during the life of a fund............................. 103 Table 15: Calculation of the costs of the fund ............................................................................................................................ 93 Table 9: Top-down valuation of a limited partnership interest ....................................................... 103 Table 16: Waterfall of the fund .......................................................................................................Waterfall ....................................................... 108 Table 22: Discrepancy in the valuation of the assets (H1 2009) ............... 109 ...................................... 97 Table 11: Financial data and growth hypotheses of a portfolio company .......................................................................................................11 - LIST OF TABLES Table 1: Financial advisers in the secondary market ....................... 100 Table 13: Projection of the debt repayment and valuation of the investment .................................. 90 Table 8: Cash flows of the fund and distributions ........... 107 Table 21: Contrast of the valuation according to the different methods............. 32 Table 3: The ten largest dedicated fund managers at the end of 2009......................................................................................................................... 104 Table 17: Net cash flows available for LPs .......................... 98 Table 12: Analysis and projection of the operating data of a portfolio company (base case) ................................................................ 95 Table 10: Main characteristics of the fund .. 63 Table 5: Tier 1 capital and 3% cap of five major US banks............ 69 Table 6: Effect of the funding ratio on the valuation (H1 2009) .. 105 Table 19: Determination of the price to be paid according to scenarios and returns .. 101 Table 14: Cash flows from the fund’s investments ............. 106 Table 20: Sensitivity of the returns to the different key variables ....................................................
.12 - ABBREVIATIONS AND SYMBOLS ASCRI AVCJ BVCA CAPEX CFO DCF EBIT EBITDA EV EVCA FCF GP IRR IRS KYC Asociación Española de entidades de Capital Riesgo (SPAIN) Asian Venture Capital Journal British Private Equity & Venture Capital Association (UK) Capital Expenditures: Investment in fixed assets Collateralized Fund Obligation: debt security of Private Equity fund or hedge fund assets Discounted Cash Flow: valuation method consisting in valuing the asset by discounting its future cash flows Earnings Before Interest and Taxes Earnings Before Interest. Taxes. Depreciation and Amortization Enterprise value (equity+ debt) European Venture Capital Association Free Cash Flow General Partner: fund manager Internal Rate of Return Internal Revenue Services: tax authority in the USA Know Your Customer: due diligence requirement that financial institutions must perform to identify their client and ascertain relevant information to doing financial business with them Leveraged Buy Out Limited Partner: Co-owner of a limited partnership Limited Partnership Agreement: constitution agreement of a Private Equity fund Material Adverse Change: legal provision that allows the acquirer to withdraw from the transaction if the target suffers a substantial change Management Buy Out Net Asset Value Net Operating Profit After Taxes Net Present Value National Venture Capital Association (USA) Private Equity Fund Purchase and Sale Agreement Qualified Matching Service: approved management services for secondary transactions by the tax authorities Right Of First Refusal Share Purchase Agreement Special Purpose Vehicle Venture Capital: Private Equity investment style in the early stages of the development of the companies LBO LP LPA MAC MBO NAV NOPAT NPV NVCA PEF PSA QMS ROFR SPA SPV VC .
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PART I: INTRODUCTION .
funds raised for the purchase of Private Equity fund interests accounted for roughly 20% of all Private Equity funds closed during the year. Many key issues are taken into account when disposing of an interest.15 - I. What are the different sales structures and their characteristics? Beyond structuring of transactions. However. the market has become more and more complex and become the reflection of new opportunities. participants.I. But how are these assets valued? Why are there such large disparities between the different bids received for the same assets? The secondary market is growing constantly and is now a major participant in the Private Equity industry. Over the last decade. the market has changed dramatically. In 2009. money is the sinews of war. motivations to enter the market and historical development are detailed (II. although the market is being established it remains inefficient. is the key consideration in a transaction in the secondary market. No study giving a comprehensive and thorough overview of the market and its main issues has been published prior to this paper. many investors and agents still do not understand all of its characteristics. From a very private confidential market to a broad liquidity provider for the investment community. Structure of the study The content of this study is organized around the following structure: The first part (section II) explains the main features of the market. the value of the asset sold. why can there be so much price disparity between the bids on the same asset? Is there a way to accurately value these assets? How could we measure the fair value of an interest in a fund? Secondary market literature is limited and due to this lack of information. What volumes are traded in the market? Who are the participants? Transactions are becoming more complex.1). size. but as Cicero said: “belli nervus pecunia”. but how? The secondary market can provide this desired liquidity which is critically important to limited partners. This study attempts to answer a lack of information and to be a guide through the characteristics and valuation of the Private Equity secondary market. INTRODUCTION During the current liquidity crisis. Also analyzed are the different sales structures and . it may be valuable for a limited partner to dispose of an interest in a Private Equity fund. Its basic characteristics. Motivations for entering the secondary market are increasingly different and complex. nuances and complexities. Introduction .
I. appendices are attached containing databases of market participants. An interest in a Private Equity fund is valued following two valuation methods: bottom-up and top-down (through the valuation model developed in partnership with several market participants) in order to demonstrate the optimal valuation method of assets in the secondary market (III.2) as well as tax and legal considerations in such transactions (II. the different valuation methods are explained based on theoretical knowledge and direct experience of secondary market participants (III. marketing documents of the present study.4). Figure 1: Structure of the study Source: Author’s own . a real world valuation is demonstrated.2).3) in order to better analyze and project future trends of the market (II. analysis of historical data in the market and a projection model of secondary transaction volume. Once the theoretical approach of valuing these assets is understood. The second part (section III) focuses on the valuation of the assets on the secondary market. The last part (section IV) lists the main conclusions of the study and its investigations.16 - processes (II. Introduction .3). its future and the valuation of these assets are highlighted in order to summarize the key contributions of the study. Main considerations on the market. To support the present study. summaries of meetings and calls with sponsors of this study.1). After analyzing the existing market valuations (III.
PART II: CHARACTERISTICS OF THE PRIVATE EQUITY SECONDARY MARKET .
«Capital riesgo (Private Equity) aspectos regulatorios. Private Equity funds (PEF) can be invested in a many different ways according to their investment strategy (investment style. In making an investment in a PEF. governs the relationship between Gómez-Acebo & Pombo abogados y ASCRI. This document. the purpose of which consists of taking short-term interests in unlisted companies. typically providing 1% to 5% of the overall capital.1 Private Equity basics2 Private Equity funds are limited partnerships. LPs sign a Limited Partnership Agreement or LPA with the GP. Theoretical framework 1. the investee company increases in value and the fund exits obtaining a profit. Characteristics of the Private Equity secondary market .18 - II. «Secondary Private Equity Discussions». the type of assets in which it invests or targets).DOC (Last accessed: 6 November 2009) 2 . A Private Equity Fund (PEF) is a collective investment scheme through which assets are administered by an investment firm (the Private Equity firm). CHARACTERISTICS OF THE PRIVATE EQUITY SECONDARY MARKET 1. 2006 3 CNMV.II. Description of the market 1. «Reglamento de los fondos de capital riesgo». fiscales y laborales». Figure 2: Different Private Equity styles Source: adapted from JP Morgan Asset Management.1.cnmv. drawn up by the GP and its advisers. The assets are divided into interests conferring to their holders.is/legislacion/capital_risk/REGLAFON. The LPs’ commitments are managed by the Private Equity firm acting as the General Partner or GP which also invest in their own funds.1. financieros. 2009. www. The objective sought is that with the help of the capital investment and fund management team. a property right thereon3. mercantiles. the Limited Partners or LPs.
2. The carried interest is defined in this part. 1. In general.ii. The secondary market is developed in response to this lack of liquidity in this asset class. In Private Equity Funds.1.2.19 - the LPs and GPs. the investor will provide capital over a period of time and the portion committed by the investor but not yet paid is called the unfunded commitment. 1. «Role of the secondaries market and LP trends». The LPA also defines the fund’s distribution structure (also called waterfall). The LP commits in writing to provide capital funding within the agreed time limit (in general ten days4) upon notification of the manager’s capital call. the carried interest is usually about 20%6.2. 2. The waterfall .iii. In this market existing investments are traded as well as the unfunded part of the commitment in combination (the most usual) or separately.1 The size of the primary market Primary markets are those in which assets or financial instruments between investors and companies or banks are issued for the first time. Characteristics of the Private Equity secondary market . The LPA sets forth details on how the fund is to be managed including the management fee5 which is measured as a percentage of the committed capital or the assets under management depending whether the fund is in the investment period or liquidation period (it is generally applied to the committed capital during the investment period and to the assets under management during the liquidation phase). Volumes of investment in Private Equity 1.2.4. The management fees are usually 2% but they can differ slightly (between 1% and 3%) according to the manager’s reputation and fund size.II. It describes the rights and obligations of the parties and sets forth the fund’s operating mandate and limitations. 4 5 Akin Gump Strauss Hauer & Feld. Carried interest represents the fund manager’s share in capital gains resulting from operations carried out by the fund once the investment of the LPs has been returned and a minimum return to the investors called the hurdle rate (about 8%) has been provided for. 2009 See section III. The fund management costs 6 See section III. The amount that LPs invest is called committed capital.2 An illiquid investment An investment in a PEF is fundamentally illiquid given that LPs commit to fulfilling their obligation to invest the agreed amount decided in the LPA over a period which is usually ranges from 10-12 years. 2.4.
Asia Private Equity. 2009 7 . Inc. AVCJ. After a short period of decline in new capital raised (mainly due to Venture Capital funds) the market rebounded from 2002 to 2007 following a period of macroeconomic expansion. In 2007. Driven by attractive returns and the enthusiasm of investors.3. representing an increase of 5% in comparison with capital raised in the first quarter of 20099. investments in Private Equity continued to fall and due to a difficult economic recovery it is forecast that annual volume in the next two years will remain constant8. According to Preqin. the Private Equity industry has grown significantly in recent years from approximately $950 billion in 2003 to $2.20 - Figure 3: Raised capital in the primary market ($ billions) 500 450 400 350 300 250 250 200 150 100 50 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Author’s own using data from: Private Equity Analyst (1996-1999). Preqin (2009). NVCA (2000-2008). the first quarter of 2010 shows a constant trend with $50 billion raised. From 2005 to 2008 the Private Equity asset class raised nearly $1.5 trillion in 200810. Preqin. EVCA. investments in Private Equity increased annually until the technology bubble burst in 2000. See appendix 8. «Global Private Equity Report 2010». The selected data are the most accurate and are from recognised and trustworthy sources 8 Bain & Company. after reaching historic highs. the trend reversed due to the financial crisis and the volume of new capital raised fell dramatically. In 2009. 7 455 375 370 255 246 117 81 133 140 70 80 120 As the graph above demonstrates. Long-Term Growth». «Private Equity secondary market: Short-Term Boom.5 trillion.II. «Q1 2010 Private equity Fundraising Update». Characteristics of the Private Equity secondary market . 2010 (via Twitter 1 April 2010) 10 Including the NAV of the portfolio and the unfunded. Thomson Reuters. 2010 9 Preqin. The data used are from a historical analysis of the information published by different market participants.
For a long period of time. Transaction volume in the secondary market Figure 4: Transaction volume in the secondary market ($ billions) 18 16. UBS Private Funds Group. transactions of traditional participants: funds of funds and secondary funds). 2010 (2009). the data that are published represent large-scale transactions in which secondary dedicated funds or fund of funds were involved.1 2.9 7. the secondary market was nearly invisible given its low volume.2. See appendix 8. The selected data are the most accurate and are from recognized and trustworthy sources 11 .2 The size of the secondary market i. etc.1. «Adams Street Secondary Networking Event».3 2.5 9. as can be inferred from the recent media interest (press.3 8. The data used are from a historical analysis of the information published by different participants.4 6.4 0.II.5 3. Characteristics of the Private Equity secondary market . Since 2003 it has become a major market.1 16 14 12 10 8 6 4 2 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Author’s own using data from: Dow Jones. «Guide to secondary Market Buyers». conferences.).21 - 1.6 0.1 The data of this market are estimates given that since it is not an organised market there is no system capable of capturing the exact volume of transactions in the market.1 2. 2009 (Sale price + Unfunded. The smaller more numerous transactions of LPs’ interests are not usually published and therefore their impact is very difficult to measure. Furthermore.4 41% 10.7 1. 11 CAGR 2002-08 13.
this large volume represents less than 1% of the total size of the volume Private Equity industry12. In 2009. which represents a 50% decrease over 2008 volume. Characteristics of the Private Equity secondary market cs .22 - In 2008. according to the present survey shown in appendix (8. secondary participants (advisers and buyers) estimated the secondary transaction volume at an average of $7. ii. funds dedicated to the Private Equity secondary market have dedicated raised commitments totalling $75 billion.1). Volume raised by dedicated secondary funds The volume raised by dedicated secondary funds has also grown significantly in the last five years. Compared with other asset classes. a positive direct relationship between the primary and secondary markets sitive seems to have existed.5 billion. Historically. transaction volume in the secondary market was over $16 billion. «Private Equity Secondary Market review». This implies that many investors keep their interests until maturity with little opportunity to change their strategy and sell their investment during this period. Since 2003.II. The majority of transactions are carried out in the United States and Europe where the main participants are present and transactions more significant. Despite the magnitude of this amount. this is a very low proportion of secondary transactions.64% . 12 Secondary transactions in 2008 (Dow Jon Guide)/Assets managed by Private Equity in 2008 (Preqin)= $16 Jones te $161 billion/ $25 trillion = 0. 2009. One of the secondary market’s growth drivers is the volume raised in the primary market. Figure 5: Geographical distribution of the transactions : 2007 1% 21% 2% 76% USA Other Europe Asia 2008 1% 43% 50% 6% Europe Asia USA Other Source: Author’s own using data from UBS Private Funds Group.
0 7. See appendix 8. Different reasons to resort to the market What characterises the market today is the multiplicity of reasons that different participants have for entering the market17. it is forecast that in 2010 secondary funds will raise some $27 billion if they manage to achieve their fundraising targets.3. 2009 .23 - Figure 6: Volume raised by secondary Private Equity funds ($ billions) 20 18 16 14 12 10 8 6 4 2 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1. «Routes to liquidity». 1.2 8.2.1 Reasons that motivate the sellers Inability to finance unfunded commitments: This reason is often cited when an over-commitment strategy is employed.1 0. 2009 (19962008). Characteristics of the Private Equity secondary market . Probitas Partners.0 2.13.5 Source: Author’s own based on data from : Dow Jones.9 13.0 12.3 18.8 7. The selected data are the most accurate and are from recognised and trustworthy sources 14 Secondary funds / total funds raised = 246/18.4 7. «Adams Street Secondary Networking Event».5% 15 See appendix 7.7 2. 13 In 2009 it was the only segment of Private Equity that grew in comparison with 2008 and represents 7.3. According to Campbell Lutyens15 and Probitas Partners16.5% of the total funds raised14.7 2.4 6. Preqin.4 4. which includes a summary of the call to Campbell Lutyens (10 March 2010) 16 Probitas Partners. «Guide to secondary market buyers». In good times the investors commit more 13 The data used are from a historical analysis of the information published by different participants. 1.II. «Private Equity Spotlight January 2010».5= 7. 2010 17 Kelly DePonte. 2010 (2009).
To focus on relationship with some GPs: having interests in few funds allows to follow a limited number of GPs and therefore to reduce the management and administrative costs. restructuring. Urgent need for liquidity (distressed sellers). CEO Fondinvest Capital. The denominator effect. Change in the investment strategy: geographical area. For more details on the denominator effect.e. To avoid distributing remaining assets of a fund to the LPs: a manager prefers to sell assets in the secondary market to return cash to his LPs rather than distribute the fund’s remaining assets19. To comply with the new regulatory accountancy risk management and capital requirements (Basel II). To lock-in performance. vintage year.2.II. Characteristics of the Private Equity secondary market .com (last accessed: 3 February 2010) 19 18 . Corporate transaction: mergers and acquisitions.an asset class in expansion».AltAssets.1.24 - money than they have to invest in this asset class and then finance capital calls with distributions from mature funds. asset class… Reorganisation of the portfolio and exit from problematic funds. This imposes a re-balancing of the different assets classes in order to comply with the allocation threshold of assets in the portfolio policy. Change in the overall strategy: sale of non-core assets. Charles Soulignac. change in the management team. most recent funds). see 4. «Secondary Market in private equity . change in the management team. sector. But during downturns when the distributions are reduced they are unable to fund capital calls. They need to sell their interests that entail large unfunded commitments (i. Denominator effect18: due to the fall in publicly traded security valuations the weighting of other assets increases in the portfolio. 12 March 2002. www.
due to the credit crunch. Since 2009. Characteristics of the Private Equity secondary market Figure 7: Reasons that motivate the sellers in the market (2007/2008/2009) 2007 13% 14% 17% 56% Source: Author’s own using data from In the figure above two major reasons why sellers resort to the secondary market stand out: active portfolio management and the need for liquidity. the main reason for selling has become the need to find liquidity.II. .
«Private Equity Secondary Market: Short-Term Boom.2 Reasons that motivate the buyers To generate large returns by exploiting market inefficiencies20: The secondary market is characterised by price and information inefficiencies. These returns are reflected in the average IRR of the secondary funds created between 2000 and 2005 which are between 20% and 30% higher than the average of the primary funds21. «Private Equity liquidity : a perspective on the secondary market ».II. Characteristics of the Private Equity secondary market .26 - Figure 8: Reasons for resorting to the secondary market in the next two years (2010-2011) "Lock in" returns Re-direct resources to other asset classes or uses Re-focus resources on the bestperforming GPs Re-balance portfolio within the PE asset class Increase liquidity 0% 20% Winter 2009-10 40% 60% 80% 100% Summer 2007 Source: Author’s own using data from Coller Capital. 2009 . According to a survey by Coller Capital carried out in the winter of 2009. the imbalance between the supply and demand for assets may create a buyers’ market. 20 21 Goldman Sachs PEG . 2009. «Global Private Equity Barometer Winter 2009-10». the main reasons why sellers are going to use the secondary market in 2010-2011 will be lack of liquidity and portfolio management (to rebalance their allocation to Private Equity or refocus resources). Long-Term Growth». Moreover. May 2008 Preqin.3. 1.
II.Top. When buying in the secondary market. the investor knows the assets in which the fund is invested and can estimate its growth and future value. To minimise the impact of the J-curve on the portfolio: 22 Probitas Partners . «Private Equity Market Review and Institutional Investor Survey». 2009 . providing greater seniority in the capital structure and therefore less risk alongside preferred returns. To invest in an identifiable portfolio of assets: In the primary market. To gain access to future funds of a certain GP: The acquisition of a fund’s interest seeks to develop a relationship with a GP in order to obtain access to future funds that will be raised. more than 50% of investors believe returns of the best secondary fund managers (those of the top quartile) in vintage year 2010 will reach an IRR of 20% or more during the life of the fund22. median and bottom IRR quartiles (by vintage year) Source: Preqin. «2009 secondary review». To diversify the portfolio: It allows diversifying the portfolio. According to a survey by Probitas Partners published in November 2009. adding a different vintage year or buying funds from an outstanding vintage year. Characteristics of the Private Equity secondary market . 2009. the investor invests in a blind pool and trusts the judgement of the GP to buy high-performing assets. To optimise the risk-return trade-off of a portfolio: In some cases the transaction allows investment with preferred conditions in the funds.27 - Figure 9: Secondary funds .
Some GPs therefore resort to the secondary market to buy interests in mature funds in order to reduce this impact. the secondary market increasingly forms part of investors’ strategy. a Private Equity fund takes 5 years to achieve a NAV of 80% of the committed capital. However. «J Curve: la vraie bonne raison d’acheter». That trend is called “active portfolio management”.II. «Secondary Private Equity Discussions». 23 24 Private Equity Magasine . The fund’s return rate reaches a turning point from the moment in which the fund distributions appear. Figure 10: The “J-Curve” Source: JP Morgan Asset Management. a PEF requires capital to invest (“investment period”) and in this phase the fund typically shows negative returns. Indeed. 2009 Capital Dynamics. the majority of transactions were led by large financial institutions (banks. The effect of this impact on portfolio returns is called the “J-curve effect”23. According to Capital Dynamics. Characteristics of the Private Equity secondary market . Upon adding more mature assets to a portfolio the J-curve effect is reduced.28 - At the beginning of the investment. 2009. «Perspectives». For all these reasons. the main motives that drive the market are those of the sellers. Buying an interest in a mature fund allows for acceleration of initial returns and improves liquidity of the portfolio since secondary funds usually generate earlier distributions24. insurance companies) that decided Private Equity is not their core business and sold their interests in the secondary market in order to reemploy this capital to other activities. in quantitative terms. 2009 .
1 The advisers In a secondary market transaction.13. «Global Private Equity Limited Partner Survey Global Survey-Q3 2009». «Private Equity Secondary Market: Short Private Short-term boom. Furthermore. Characteristics of the Private Equity secondary market cs . According to a survey by Fidequity. according to current analysis of existing financial advisers (see list in ancial appendix 1.29 - Figure 11: Importance of the secondary market to investors’ Private Equity strategies : 22% 10% 68% Not a core part of the strategy Core part of strategy Of growing importance to strategy Source: Author’s own based on data from Preqin.4. the buyer must employ the services of a legal adviser to analyse rmore. the existing LPA of the fund in which it invests and to draft the Purchase and Sale Agreement (PSA). 27 See appendix 7. sellers and buyers. only 25% of them have expressed concerns regarding these sales. i. Q3 2009 Preqin. «Private Equity Secondary Market: Short Short-term boom.4. The financial advisers27 In July 2010. which includes a summary of the call to Campbell Lutyens (10 March 2010) . there were nearly 50 financial advisers serving the market. carried have experienced a secondary transaction in their funds. the GPs’ attitude toward secondary transactions carried out in their funds is generally positive. 2009. the seller must employ the services of legal and financial experts in order to maximise the transaction value and correctly understand the inherent risks.1). 2009 . ndary 1.II. According to 25 26 Fidequity. long-term growth». 1. The secondary market participants The three main participants active in the secondary market are advisers. longterm growth». more than 80% of investors in the Private Equity secondary market seek to increase their exposure to this asset class25. Furthermore. A study carrie out by Preqin26 showed that whereas nearly 63% of GPs .
He can advise on the most appropriate and then structure it. etc. private sale…). evaluating the fund’s underlying assets and detailing the valuation method. • • • • Seeking the service of an adviser is highly advisable when carrying out a secondary market transaction because it typically achieves the best returns (in the acquisition or sale) and provides for the efficient management of many complex issues (portfolio analysis. manages the queries. The advisers mainly act on behalf of the seller and they advise them in numerous ways29. but also to compensate for declines in the main fundraising activity of many placement agents. • • Knowledge of the market: the adviser knows the current state of the market and the preferences of large buyers. provides suitable information.II. However. knows the potential buyers and can contact them. Detailed knowledge of the buyers in the secondary market: adds value in the marketing strategy. 2009 Dow Jones. The data 28 29 Preqin. 2009 30 “As a general rule the most successful man in life is the man who has the best information. «The 2009 Preqin Private Equity Secondaries Review». transaction price). Characteristics of the Private Equity secondary market . To structure transactions: the adviser knows the different options for structuring transaction and their advantages and drawbacks. This is a growing sector and it is forecast that new advisers will enter the market in coming years to exploit new market opportunities.30 - Preqin. unfunded part. valuation. To manage the process: advises in the selection of the most suitable sale process (auction. transaction price + unfunded. Price orientation: evaluating a price range for the asset. legal. Cogent Partners and Campbell Lutyens. terms. complexity) and according to the base used to calculate the commission (NAV + unfunded. The three largest advisory firms in the secondary market that advise on the largest transactions are UBS PFG. 47% of currently active financial advisers have entered the market since 200328.” – Benjamin Disraeli . receives bids. «Guide to secondary market intermediaries». reviews them and assesses which is the best. one must distinguish specialist advisory firms in the secondary market from brokerage firms which have no advisory capabilities in structuring and valuation of complex transactions. coordinates legal advisers. The adviser knows the current valuations of the market and has a team capable of modelling the asset price. Advisers usually charge a commission that depends on the characteristics of each transaction (size.)30. To close the process: manages the transfer of funds and closes the transaction.
The legal advisers In a secondary transaction. the legal adviser mainly manages the review of the fund’s LPA and the drafting of the PSA.1.31 - gathered for this analysis indicates commissions are usually between 1% and 3. Breslin AG (2 December 2009). UBS PFG (2 February 2010) 32 See list of financial advisers in the secondary market in appendix 1. Table 1: Financial advisers in the secondary market32 Financial advisers (alphabetical order) Cogent Partners Patronus Capital Continental Capital Partners plurisvaluation Credit Suisse Group Preqin Fidequity Probitas Partners Global Finance Rainmakers Partners Greenhill & Co. Before a sale the LP must ensure the transaction can be carried out according to the LPA. that there are no clauses that prevent it. Characteristics of the Private Equity secondary market .5% of the sale amount defined as the NAV + unfunded31. Campbell Lutyens (10 December 2009).II. the buyer’s legal adviser must analyse the LPA of the fund in which his client wishes to invest in order to understand how exactly it operates. Richmond Park Partners Griffin Private Equity Group Rotschild Houlihan Lokey Roux Capital Lancea Partners Scalar Partners Lazard Secondcap Matrix Group Setter Capital Mercury Capital Advisors Somerset Capital MHT Partners Secondary Advisors The Camelot Group International Mummert & Company Triago Nakatomi Capital UBS Private funds Group Palomar Corporate Finance Park Hill Group Almeida Capital Alpha Associates AG Altitude Capital Advisory Ariane Capital Partners Augusta & Co Autumn Capital Partners Axon Partners Axonia Partners Azla Advisors Bluetower Capital Boyd & Co Breslin AG Campbell Lutyens Capital Dynamics Capstone Partners Carta Diem Champlain advisors Source: Author’s own ii. but also according to current tax laws. Furthermore. its management clauses and compensation and the admission consent. Pantheon Ventures (9 December 2009). See appendix 7. which summarises the calls to Secondmarket (1 December 2009). This table contains advisers and intermediaries 31 .
32 - He also advises his client in the drafting of the PSA. See list of legal advisers in the secondary market in appendix 1. however in the case of direct transactions (acquisition of a direct interest in a portfolio company). Table 2: Legal advisers on the secondary market Legal advisers (alphabetical order) 33 Covington & Burling Debevoise & Plimpton Fried Frank Goodwin Procter Source: Author’s own Howard Rice Kaye Scholer Kirkland & Ellis OR'Melveny & Myers SJberwin Weil. in which important clauses such as contingent conditions. clawback conditions. Only legal firms with a dedicated practice are included.II. 33 .2. All these considerations are crucial to the acquisition/sale process in the secondary market and may be unfamiliar to the counterparties requiring experts be engaged to analyse these details to ensure transaction success. legal firms that advise on mergers and acquisitions transactions are usually hired. Characteristics of the Private Equity secondary market . material adverse change clauses (MAC) or compensation clauses will have to be negotiated. Gotshal &Manges Wilmer Cutler Pickering Hale and Dorr Few legal firms have a practice dedicated to secondary transactions.
2 The sellers There are two types of sellers in the market: investors in funds (LPs) and the managers themselves (GPs).2% Corporate Endowment 18. Characteristics of the Private Equity secondary market .4% 11. «Adams Street Secondary Networking Event». fund of funds and hedge funds.4% 6.9% Family office / Foundation Pension funds (Public and private) Asset manager Financial institutions Source: Author’s own based on data from UBS Private Funds Group. financial institutions (banks.0% 40% 30% 20% 31. i. 2009) 100% 90% 80% 70% 60% 25. UBS Private Funds Group. 35 Real Deals.II. 2010. 2010. Investors in funds (limited partners) usually represent close to 75% of the number of transactions and managers (General Partners) the remaining 25% according to data published by UBS34. Furthermore.3% 5. Asset managers include Private Equity GPs. 2009 34 . family offices and wealthy individuals act as sellers in the market35. «Secondaries roundtable 2009». endowments. Based on the number of transactions in the market. insurance companies) have represented between a third to a half of the secondary transactions. «Adams Street Secondary Networking Event».8% 3. Breakdown is based on number of transactions brought to market. Figure 12: Breakdown by seller type in the secondary market (2008 vs.8% 50% 27.1% 10% 0% H1 07 to H1 08 H1 08 to H1 09 42. foundations.33 - 1. pension funds.3% 5.8% 10.1% 12.4. listed vehicles. The LPs (investors in funds) Traditionally.
Listed funds of funds40: These are listed investment vehicles.AltAssets. 2009 38 Web page: http://www. A true “closed box” (it has no income apart from the distributions of the fund in which it is invested) until it issues additional securities. In periods of crisis.2% of their assets to the Private Equity asset class37. Preqin details in a report that on average these investors seek to allocate 6. According to a study by Preqin. October 2009 40 See appendix 7. Calpers. Many of the banks have invested in this asset class to be able to finance leveraged buyouts (LBOs) and to advise on mergers and acquisitions. These vehicles employ an over-commitment strategy and are highly leveraged. pension funds in the United Kingdom have reduced their percentage allocation to Private Equity from 2. which summarises the email from Preqin (2 December 2009) Preqin.2bn (€930mn) in commitments made to funds managed by Warburg Pincus according to several people familiar with the transaction.html 39 Preqin.4. feeder fund and coinvestment fund interests to Lexington in July 2010. Bank of America was said at the end of July 2010 to be in talks with Lexington Partners and the sovereign wealth fund China Investment Corp (CIC) to sell $1. they seek to allocate 3.1 billion AUM) sold more than $2 billion of interests in Private Equity funds in 2008.com/private-equity-news/by-pe-sector/buy-out/article/nz17417. In the midst of the financial market crisis. banks are incapable of playing their financing role. «2009 Global Private Equity Review». For example. Characteristics of the Private Equity secondary market . Currently they are the most important sellers in the secondary market. mezzanine fund. Insurance companies: These companies offer insurance policies to the public by direct sale or through other sources such as the employees’ benefit plan. the pension fund of the public employees of the state of California ($237. Recent transactions include the sale of a $1.5% on average in June 2008 to 1% in June 200938. According to a study by the National Association of Pension Funds in the United Kingdom. which summarises the email from Preqin (2 December 2009) . which compels them to reduce their exposure to this asset class that has never been a core business.1bn sale of Citi’s fund-of-funds. Pension funds: They are large asset owners that invest capital obtained through the accumulated savings of a group of people in order to make payments to their stakeholders once they have reached retirement age.7% of their assets to the Private Equity39 asset class. «Survey by insurance companies investing in Private Equity».9bn Private Equity portfolio of Bank of America to Axa PE in April 2010 and the $1.34 - • Banks36: These entities tend to enter and exit the Private Equity market in cycles. they suffered greatly • • • 36 37 See appendix 7.4. They manage large sums of money and invest a portion in Private Equity.II.
The largest are those of American universities. or a part of or all the portfolio of the fund(s) they manage. On average. According to a study by Preqin these funds on average seek to allocate 11. Accordingly they have had the same problem as listed funds because of the reduction in fund distributions. Another “closed box”. family-offices or GPs (fund managers). ii. According to a survey conducted by Probitas Partners published in November 2009. «Survey by Endowments investing in Private Equity». The GPs (fund managers) • The General Partners or fund managers may also be sellers in the market whether it may be selling a fund interest. 50% of those surveyed (institutional investors) actively purchase direct positions in funds and 10.4.35 - from reduction in fund distributions and severely reduced access to credit leading to increased use of the secondary market. October 2009 43 Preqin. insurance companies. endowments. Foundations and family offices: Foundations are non-profit organisations that dedicate their assets to pursuing general aims and family offices are companies that advise wealthy families.8% actively purchase direct positions in companies in the secondary market44. «Private Equity Market Review and Institutional Investor Survey». Traditional buyers are funds dedicated to the secondary market and funds of funds that invest part of their capital in secondary assets.II. The non-traditional are diverse institutional investors: foundations.8% of their assets to the Private Equity asset class42.3 The buyers Buyers are traditional or non-traditional depending on whether these investors have capabilities to invest in the secondary market. 41 42 See appendix 7. 2009 44 Probitas Partners . a direct interest in a portfolio company. these institutions seek to allocate 11.1% of their assets to the Private Equity asset class43. 1. 2009 . Characteristics of the Private Equity secondary market . such as Harvard ($26billion) which has had to access the secondary market to comply with its liquidity needs. • Endowments41: These funds seek to cover a part or all the needs of the institutions to which they belong with the returns on their investment portfolios. «2009 Global Private Equity Review». which summarises the email from Preqin (2 December 2009) Preqin. pension funds.4. these funds have no income and employ an over-commitment strategy.
2 48 Preqin. the list of which is in funds: nalysis appendix (2.II. it is a possibility 47 See appendix 2.1 and 2. According to a study by Cogent Partners. According to a study by Preqin.H1 09) : Source: Author’s own based on data from Cogent Partners. indicates a total of 77 companies that have funds dedicated to investing in the secondary market. • Fund-of-funds: Investment vehicles designed to invest in other funds. These firms manage a total of close to $130 billion dedicated to the secondary market47.1 and 2. Characteristics of the Private Equity secondary market cs . i. «Secondary Pricing analysis Summer 2009». Traditional buyers According to present analysis of secondary buyers (see in appendix 2). there currently are 140 buyers with secondary asset acquisition programmes. 2009.2). however. «The 2009 Preqin Private Equity Secondaries Review». 57% of the investors by volume were traditional45. The amount these funds can allocate to secondary se assets (defined in their LPA) has greatly increased over time and is usually about 20%46. there is no requirement to invest in secondary assets. According to the author’s own survey. This percentage is that which they can invest in secondary assets. during the first half of 2009.36 - Figure 13: Buyer types (by transaction volume . «Secondary Pricing analysis Summer 2009 2009 Secondary 2009». the majority of the dary managers are from the United States (56%) and from Europe (36%)48. 2009 . At the end of 2009 the ten largest fund managers dedicated to the secondary market were as follows: 45 46 Cogent Partners. these funds usually invest a p accelerate portion of their capital in the secondary market. • Dedicated secondary funds Analysis of buyers in the market. In order to nvestment diversify their portfolio and accelerate returns.
ii. 2009 . Characteristics of the Private Equity secondary market .4 8. However. these buyers invest in this asset class in order to diversify their portfolio or to take advantage of specific opportunities.3 5 4. some have investment programmes dedicated to the secondary market. «Secondary Pricing analysis Summer 2009».1 Source: Author’s own These ten firms manage 64.7 6 5.9 12 10 8. They usually buy interests in funds (LP Interest) through straight and opportunistic sales.37 - Table 3: The ten largest dedicated fund managers at the end of 2009 Rank 1 2 3 4 5 6 7 8 9 10 TOTAL Name of the Manager Lexington Partners Goldman Sachs Private Equity Group HarbourVest Partners Coller Capital Credit Suisse Strategic Partners Landmark Partners Partners Group AlpInvest Partners AXA Private Equity Pantheon Ventures Secondary funds managed ($ Billions) 15.II.4% of the dedicated secondary funds. Non-traditional buyers are considered to be investors that resort opportunistically to the secondary market. Non-traditional buyers According to a study by Cogent Partners. 49 Cogent Partners. during the first half of 2009 43% of the investors by volume were non-traditional49.2 6.6 82. In general.
2009 See appendix 7. Since they are private these marketplaces are restricted to Qualified Institutional Buyers (QIBs) by market regulation authorities50. «Guide to secondary market intermediaries». i. which summarizes the call to Secondmarket (1 December 2009) . 50 51 Dow Jones.2. $2 billion of interests for sale) and Investorflow.II.4. 2009. 1. we highlight the ever-growing presence of private marketplaces. These firms act as intermediaries that bring together sellers and buyers. LP interests are transacted between a limited partner (seller) and a secondary investor. The largest in the segment of LP interest transactions (Private Equity.38 - Figure 14: Non-traditional buyer types (H1 09) GP 9% Foundation 11% Endowment 11% Pension fund 36% Family Office 16% Insurance company 17% Source: Author’s own based on data from Cogent Partners. «Secondary Pricing analysis Summer 2009». Venture Capital. According to Mr Bollerman of Secondmarket (Head of limited partnership interest group) this market segment’s growth is “exceptionally important”51.3). funds of funds and hedge funds) are the firms Secondmarket (c. A source of liquidity for limited partners In these marketplaces. interests in funds and direct interests in private companies can be exchanged.4 Other emerging participants: the private marketplaces Besides those three groups of main participants. Characteristics of the Private Equity secondary market . QMS status gives general partners the ability to provide additional liquidity to their LPs for trades of their fund interests. In the USA these marketplaces are deemed Qualified Matching Services (QMS) if they comply with IRS (Internal Revenue Service) requirements. A list of the main marketplaces for exchanging interests in Private Equity funds is in appendix (1. On these electronic platforms.
AltAssets. NYPPEX.II. (Last accessed: 20/10/2009) . one of the key considerations when using these platforms is confidentiality of information. The largest marketplaces for private company stocks are Secondmarket.2.39 - Partnerships that utilize QMS can trade an additional 8% of the total amount of the fund besides the normal 2% each fiscal year without losing the limited partnership status and associated fiscal advantages52.2: Fiscal considerations See appendix 7. Characteristics of the Private Equity secondary market .3. According to Daniel Green of Greenpark Capital. Furthermore regulation on trading in these private marketplaces and the financial viability of the process will govern the success of these new market participants. which summarises the call to Secondmarket (1 December 2009) 54 AltAssets’ web page: www. These marketplaces typically charge an intermediation fee by of about 3% of the sale price (adding other costs if this commission does not cover the fixed costs of the platform)53. In confidentiality clauses of many LPAs the exchange of interests on this type of platform may not be allowed54. 52 53 See part 3. interview with Daniel Green. A source of liquidity for the fund managers (GPs) These marketplaces are also a source of liquidity for fund managers (GPs) of Venture Capital funds (VC) and Leveraged Buyout funds (LBOs) which can sell their fund interests or direct company interests thus providing an additional exit strategy. ii. Portal Alliances LLC and SharesPost.com.
upenn.wharton.40 - 1. the secondary market has grown since its beginning due to two main factors55: The growth of the primary Private Equity market as the base of the secondary market. a partner at AlpInvest Partners. Preqin. UBS (Secondary volume 2009).II. Wharton Knowledge. History According to Wouter Moerel. Chicago Board Option Exchange. 9 August 2009. http://knowledge. asset allocation.edu/ (last accessed: 20 December 2009) 55 . In light of these two reasons and considering historical volume and volatility in the market (index VIX) we can highlight three major phases of the secondary market.) Figure 15: History of the Private Equity secondary market Source: Author’s own using data from: Dow Jones. The systemic shocks which compel investors in Private Equity (LPs) to sell their investments for various reasons (liquidity. Characteristics of the Private Equity secondary market . etc.5. Private Equity Analyst. «Private Equity Secondary Funds: Are They Players or Opportunistic Investors?».
Arshi Thind. He began in the 1970s managing a Venture Capital fund for the president of IBM. «Inside the Growing Secondary Market for Venture Capital Assets».com/assets/html/about_coller/coller_secondaries.html. In 2001 the direct secondary market expanded with the first significant direct (or synthetic) secondary transaction led by Coller Capital which bought a portfolio of 27 technology companies from Lucent Technologies59.html.ventureintelligence.5. In the year 2000 Coller Capital and Lexington Partners together led the first secondary transaction with a value larger than $1 billion by buying the Private Equity portfolio of NatWest following the bank’s takeover by Royal Bank of Scotland. as Soviet ambassador. founder of Landmark Partners (1989).II. http://www. “I realized that entering in a posterior phase. Thomas J. 2009 58 Sam Scherwin. (last accessed. In 1984 the VCFA Group created the first dedicated secondary fund in the USA with investor commitments of $6 million. Web page: http://www. when financial difficulties begin to soften.41 - 1. the first investment firm formed to acquire Private Equity interests in the secondary market.you could not trade out. There were some isolated transactions and mainly involved one interest in a fund and generally between the initial investors. According to Mr. Characteristics of the Private Equity secondary market . Managing Director at HarbourVest. Later other pioneers such as Stanley Anfeld. Dan Burstein. founder of Coller Capital (1990). 31 December 2009) 57 BVCA. Wilson. In 1998 Coller Capital launched the first global secondaries fund. he founded Venture Capital Fund of America (today VCFA Group). «BVCA Research note: The Private Equity Secondary Market». could generate returns of about 60%” stated Dayton Carr56.in/blog/2008/01/father-of-pe-secondaires. There only existed the need to exchange interests in the largest and most popular funds58. Arun Natarajan.. At that time Dayton Carr carried out the first known secondary transaction by buying the fund that he managed and began to sell the interests. At the end of 1979 American President Carter named Thomas Watson Jr. 2007 59 Coller Capital’s web page. In 1982. helped to develop the market. and with a discount.”57. (last accessed: 5 January 2010) 56 . Watson Jr. Private Equity at that time was “A desert. In the beginning it was a niche market and there was no established secondary market. and Jeremy Coller.1 The beginning of the market (1982-2002) Dayton Carr is considered to be the father of the Private Equity secondary market.collercapital.
2 The growth of the market (2003-2007) At the beginning of this period the market expanded as a result of the systemic shocks from 2000 to 2001 in which the technology bubble burst and attacks on the twin towers took place. Abbey National. Merrill Lynch. http://www. (last accessed: 5 January 2010) 61 Greenpark Capital. Bank One. JP Morgan. «With debt market tightening. growth in the primary market due a period of economic expansion was the main growth driver of the secondary market. During this period the secondary market evolved becoming more efficient and replacing a market characterised by limited liquidity and highly discounted prices. It was still a “cottage industry” 60.5.II.collercapital.42 - Figure 16: The beginning of the market (1982-2002) Source: Author’s own From the beginning of the market until 2002 the main market driver was growth of the primary market and only $15 billion was exchanged in the secondary market.html. what is the likely impact on the primary PE / secondaries market?». Investors began to seek an early exit of their unpaid commitments to Private Equity and in particular to Venture Capital. UBS AG. 2007 60 .com/assets/html/about_coller/coller_secondaries. During this period many of the large financial institutions (Deutsche Bank. 1. Characteristics of the Private Equity secondary market . New investors in this asset class were accessing the secondary market to create portfolios and relationships with GPs61. Dresdner Bank. Moreover. For the first time in the history of the Private Equity secondary market assets were exchanged at their net asset Coller Capital’s web page. Bank of America) began selling large portfolios of interests in Private Equity funds and interests in “pay-to-play” funds used as a mean to obtain lucrative leveraged finance or merger and acquisition mandates but that generated losses in the banks’ accounts.
43 - value (NAV) or even at a premium (called “secondary bubble” due to the intense competition for quality assets62) and liquidity greatly increased. said during a conference in November 2008 that returns on the trillion dollars invested at the height of the Private Equity boom in 2006-2007 will be “negative. The increasing cost of financing of highly leveraged portfolio companies has put the future of double digit Private Equity returns in doubt. The crisis: growth driver in the secondary Marleen Groen of Greenpark Capital classifies the secondary market as a “countercyclical”63 market. Moreover.5. When the financing tap is turned off. active portfolio management. Reflecting the increased issuance in the primary market the secondary market became a portfolio management tool. the denominator effect. «Observations on the Private Equity Secondary Market». «Contrarian Secondaries firms harvest golden opportunities». Funds that invested in 2006-2007 (the maximum in the market) purchased at high valuation levels and now face many difficulties due to a high level of leverage. The financial crisis that was unleashed and the infamous “credit crunch” with its disastrous consequences in the real economy have been catalysts to growth of the secondary market. 2009 62 . listed Private Equity funds have suffered from the reduction fund distributions and financing restrictions. 1. the cost of financing increases and the value of investments64 falls. Many investors began to reduce their exposure to this asset class by seeking another risk/return trade-off and this benefited the secondary market.3 The credit crunch (July 2007-2009) i.II. a large Private Equity investment firm in London. At the same time that operational risk is increasing the financial risk (above all for the LBOs) of Private Equity investments rises. Private Equity news. Furthermore. «With debt market tightening. This period witnessed a niche market evolve into an active market with broad supply and the appearance of many specialist participants (buyers or advisers). Greenpark Capital. very negative”65. «The buyout of America» p 129. 2009 66 Goldman Sachs Asset Management. and the lack of liquidity helped push the secondary market upwards. Penguin. Since 2007 when the American real estate market collapsed a new market environment has emerged. 11/02/08 64 If the discount rate (WACC) of the cash flows increases. Without access to new financing they have had to sell assets by resorting to the secondary market66. the value of the asset falls mechanically 65 Kosman Josh. 2007 63 Catherine Craig. sometimes dramatically. Opportunities to exit and refinance investments are severely diminished. Guy Hand who heads Terra Firma Capital Partners. Characteristics of the Private Equity secondary market . what is the likely impact on the primary PE / secondaries market?».
Furthermore. Greenpark Capital. The demand that can be quantified by existing “dry powder” is only about $40 billion69 (for active buyers: secondary funds. part 4. i. according to David Wachter. some wounded severely during the crisis. funds of funds and other investors with programmes dedicated to the secondary market) at the beginning of 2009. October 2009 67 .Winter 20092010». This supply demand imbalance of close to $60 billion will create a buyers’ market in which asset valuations fall. «Secondary capabilities pitchbook». 2009 69 According to a survey by UBS at the beginning of 2009.2. have been growth catalysts in the secondary market. 2008 See section II.II. Indeed. «Global Private Equity Barometer . Citigroup. Figure 17: Changes to LPs’ exposure to secondary funds over the years 2008-2009 Not committed to secondary funds… Decreased 4% Increased 34% No change 33% Source: Author’s own based on data from Coller Capital. as much as $200 billion of Private Equity commitments will be offered in the secondary market in the period 2010-201168 or approximately $100 billion annually. UBS PFG.44 - And finally. financial institutions. RBS or AIG have been a source of acquisition opportunities in the market through the sale of nonstrategic assets such as Private Equity portfolios. ABN Amro. «Impact of the credit crunch on the secondaries market». Falling valuation: a buyers’ market During this period asset valuations have been driven down due impairment of company fundamentals and valuation multiple contraction but also from the imbalance between the abundant offers (due to “distressed sellers”) and reduced demand from investors in the secondary market. HBOS. Bear Stearns. Lloyds. 2009. Basel II 68 Dow Jones. ii. Managing Director of W Capital Partners. Characteristics of the Private Equity secondary market . «Guide to Secondary Market Buyers». the Basel II Accords multiplies by approximately 2 to 3 the cost to banks of investing in Private Equity67 providing added impetus for secondary sales.2. The large bankruptcies and rescues such as those of Lehman Brothers. Merrill Lynch.
Sellers that have higher higher ellers price expectations do not agree and due to the wider bid/offer spread transactions are not carried out as demonstrated by a study undertaken by Triago indicating that 86% of transactions in 2008 were not carried out due to low valuations. The market is perfected During the credit crunch. the Private Equity secondary market is perfected. 2009. some cases buyers that signed a sale agreement withdrew by exercising the Material w 70 Adverse Change clause (MAC) abandoning a transaction agreed a few months earlier71.45 - In 2008 and 2009 sellers accepted large discounts to net asset value (NAV) of sold assets. The specialist participants such as advisers have develop developed new strategies to create value by means of complex structured transactions. iii. «MAC uncertainty grips sellers in secondary market 03/11/08 MAC market». «The Secondary Seller's Options». Due to valuation reductions from one quarter to another (due to the fall in the value of portfolio companies) and their urgent need for liquidity. Figure 18: Proportion of investors who ruled out transactions in 2008 because of pricing concerns : 14% Yes No 86% Source: Author’s own based on data from Triago. The lack of visibility prevents carrying out the transactions: the bid-offer spread t Uncertainty regarding the economic outlook causes investors to be very selective regarding the quality of assets they buy and the pace of transactions subsequently fell In fell. iv. . The NAV of their investments refers to the last value published by the GP (published ea each quarter).II. Characteristics of the Private Equity secondary market cs . Many investors in Private Equity now access the market increasingly making structured transactions or direct (synthetic) transactions of entire portfolios. sellers were forced to accept high discounts. material adverse change clause Private Equity Online. 70 71 See legal considerations. To compensate for risk incurred by this lack of economic visibility return requirements on o their investments increases and high discounts to NAV are offered.
2 Direct sale Previously called synthetic sales. the sale of limited partnership interests and the sale of direct interests. The object of the sale may be part or all of the interest in a company or in a portfolio of companies directly held by a fund. Characteristics of the Private Equity secondary market . Figure 19: Two types of secondary transactions: sale of limited partnership interest and direct sale Source: Author’s own 2. The sale can be carried out by creating a special purpose vehicle which will buy the companies or interests in the companies and use a new manager (GP) hired to .1.II.1 Sale of limited partnership interests This type of transaction occurs when an investor in a fund (LP) is willing to sell his interest or a portfolio of interests to another investor that becomes the new LP. The distinguishing feature of this type of transaction is that the buyer purchases the funded part of the fund but also commits to assume the unfunded commitments that the interest entails. these transactions occur with the sale of a portfolio company directly by a Private Equity fund to another Private Equity fund.1. 2. Different types of transactions In the market transactions are classified into two groups according to the type of transferred asset.1. The transactions on the market: Description of the different structures and sale processes 2.46 - 2.
direct transactions only represented 15% of total transactions73. «Private Equity Secondary Funds: Are They Players or Opportunistic Investors?». 9 Private or August 2009. However. usually represent close to two thirds of the total transactions while direct transactions represent the other third. In times of crisis underlying companies may need additional investment but the GPs may not nvestment have the fund resources to back follow on investments. «Adams Street Secondary Networking Event». 2.5 to 2 times the initial investment) and management fees (low management fees and carried interest). 72 Wharton Knowledge. «Adams Street Secondary Networking Event».47 - manage and ultimately sell the vehicle’s assets72. . 2010.II. According to UBS the sales of limited partnership interests. A GP may also create an annex fund that takes ownership in companies of the other fund. in 2009. Figure 20: Transaction volume breakdown – (Limited partnership interest and Direct sale) (2007 to : 2009) Source: Author’s own based on UBS data.wharton. 10 February 2010 Event». Characteristics of the Private Equity secondary market cs .upenn.2. A sale can also be accomplished by acquiring the assets with a vehicle managed by specialised direct sales managers. Different sale structures There exist different structures that allow finding liquidity for an interest or a portfolio of interests in companies or funds.edu/ (last accessed: 20 December 2009) 73 UBS Private Funds Group. by transaction volume. http://knowledge. (low If the GP wants to sell direct company interests out of funds managed there are different sales structures that can be adapted to the manager’s needs. Therefore many create annex funds follow-on that invest in the portfolio companies with preferred conditions of returns (1.
The exception is securitisation of the unfunded which is a structure that can only be applied to the sale of a limited partnership interest given that it is the only type of transaction that would entail an unfunded commitment.II. .48 - Figure 21: Different sale structures in the secondary market Source: Author’s own All the structures from the table above can be applied to each type of transaction: sale of a limited partnership interest or direct sale. Characteristics of the Private Equity secondary market .
In a direct sale the buyer acquires the entire portfolio company. .1 Straight sale This sale structure is the most common and widely used.2.II.49 - Figure 22: Comparison of the characteristics of the different sale structures Source: Author’s own As can be seen in the table above each sales structure depends on the type of asset sold and on the objectives and concerns of the different parties. Characteristics of the Private Equity secondary market . It consists of the straight sale of an interest or of a portfolio of interests in portfolio companies or funds. In the case of a sale of a limited partnership interest the seller sells all his interest to the buyer who pays for the funded part of the fund and commits to assume the unfunded commitments that the fund’s interest entails. 2. The structures presented in the table demonstrate there are various options available to satisfy a seller’s requirements.
2009 Campbell Lutyens. it can also be accomplished through the sale of limited partnership interests. The buyer selects the funds or companies in which he wishes to invest and buys part of the interest of the fund in these.2. 2008 .2 Strip Sale74 In this structure. 74 75 Probitas.2. «The Private Equity Secondaries market: a complete guide to its structure transaction and performance». imposed by the GPs. This transaction structure was very popular in the years 2006-2007 but is infrequently used in the current environment due to existing supply/demand imbalances in the market. some or all the interests of the manager (funds or companies). the manager of the limited partnership interests may reduce his overall exposure while maintaining close relationships with the underlying fund managers75. Characteristics of the Private Equity secondary market . With this structure. 2. the buyer acquires an interest or a portfolio of interests in portfolio companies or funds combined with an investment commitment in a new fund managed by the seller. This structure. This type of transaction also requires the secondary buyer to have the capacity to fund primary investments. However. the buyer purchases a part of the interest of a fund in one.II.3 Stapled Secondary In this structure. allows them to facilitate their next fundraising.50 - Figure 23: Traditional sale structure: straight sale of a limited partnership interest Source: Author’s own 2. «Second thoughts newsletter». This structure is usually used more for direct sales transactions (of portfolio companies) in order to generate valuable liquidity to back the manager’s investments in a much less dilutive manner than by means of an annex fund with preferred return. PEIbooks.
typically financed by the buyer. They vary from one transaction to another but as a general rule the seller establishes a special purpose vehicle (SPV) with a company specialising in the secondary market (the buyer) to create a single legal and financial framework that fulfils seller objectives. In order to successfully execute a structured transaction. Characteristics of the Private Equity secondary market . the seller must determine his most important objectives– sale price. Each structure is tailor-made according to the asset and the objectives and concerns of the different parties. which summarises the call to UBS (26 November 2009) The investor may have the chance to use the losses as a tax shield 78 UBS Private Funds Group. It is therefore very advisable to work with an experienced adviser on these structures. 2009 . The vehicle.2.51 - Figure 24: Structure of a stapled secondary sale of a portfolio of limited partnership interests Source: Author’s own 2.1. accounting. acquires the assets of the seller.II. Additionally they allow carrying out large transactions by offering downside protection. who in exchange receives the proceeds of the sale in cash and an interest in the capital of the new entity. administrative burden – and suitably structure the variables of the transaction taking into account legal. Agreement on the shareout of cash flows: In several structured transactions a cash flow shareout agreement is defined which governs all future capital calls and distributions of the assets that belong to the NewCo78. each is unique but some important common variables stand out. relief of future capital calls. administrative and regulatory considerations. «Private Equity Secondary Market Review». liquidity. Therefore.4 Structured secondary sale76 These structures are innovative and becoming more frequent since they allow sellers to achieve much more attractive prices than in a traditional transaction. tax77. Depending 76 77 See appendix 7.
the buyer may request financing in order to leverage the acquisition. the distributions change with the LP receiving the majority of the distributions (between 70% and 90%)79. Seller financing or financing by a third party80: When structuring a transaction the financing variable is crucial. lower its financing cost and obtain some downside protection. Besides the loan. 2009 See appendix 7. . reduction of risks. 79 80 Dow Jones. if a seller cannot assume large capital calls.5 to 2 times his investment. «Guide to secondary market Intermediaries». which summarises the call to UBS (26 November 2009) . he receives the vast majority of the distributions (between 80% and 90%) until reaching a preferred return of between 1. he may request a credit line in order to finance any imbalance that may appear between the capital calls and distributions. depending on the asset and the terms of the transaction. When this return has been exceeded.the terms can be highly specific to each structure. 2009. Figure 25: Structured joint-venture sale of a portfolio of limited partnership interests Source: Adapted from UBS Private Funds Group. Characteristics of the Private Equity secondary market . In exchange the buyer receives all the distributions up to 100% of the capital invested. «Private Equity Secondary Market Review». relief from capital calls.II. For example. Then. the buyer may finance it. etc.1. In order to finance the asset acquisition.52 - on the seller’s objectives .liquidity.
from the seller.5 Total return Swaps81 These are derivatives contracts designed to swap the cash flows between two parties. dividends and distributions) for a variable interest determined as benchmark + spread. follow-on. 81 Kelly DePonte. 2009.2. The protection buyer keeps the asset but exchanges the cash flows from the asset (capital calls. Probitas Partners. In this structure. Characteristics of the Private Equity secondary market . «Routes to liquidity».53 - He may request this financing from a third party or. «Routes to liquidity». This derivative contract seeks to transfer the credit and market risk of the underlying asset to another party that seeks exposure to this asset. 2009 . since credit availability is currently restricted. a floating interest rate is swapped for all the cash flows of a portfolio of interests in funds or in companies. Advantages: Maximises the asset price Rapid execution (it does not need the GP’s approval) Drawbacks: It does not remove the asset from the “seller’s” balance sheet and does not generate liquidity upfront (there is no initial payment) The contract entails the creation of counterparty risk. Figure 26: Total return swaps for a portfolio of limited partnership interests Source: Author’s own using data from Probitas Partners. The protection seller receives the cash flows of the asset but assumes the risk of valuation fluctuations (capital gain and loss). 2. It changes the nature of the asset on each party’s balance sheet but it does not remove it from the balance sheet of the counterparty seeking to reduce risk.II.
This structure divides the cash flows of the asset into strips or tranches that have different payment priorities and different risk/return profiles82. divides the interests between the funded and the unfunded commitments. The LP keeps his funded interest but the unfunded is securitised and sold off.2. Probitas Partners. «Routes to liquidity». 2009. 2009 Private Equity Analyst. «Secondary firms cook up new ways to close deals».2. 2009 . The secondary investor buys these new securities by creating a special purpose vehicle of which he can become the manager.7 Securitisation of the unfunded83 This structure. Figure 27: Securitisation by means of CFOs Source: Adapted from Probitas Partners. Characteristics of the Private Equity secondary market .54 - 2.II. «Routes to liquidity». which can only be used in the sale of limited partnership interests.6 Securitisation: CFOs In this structure the buyer acquires the assets via a SPV and later refinances the acquisition by issuing CFOs (Collateralised Fund Obligations). Figure 28: Securitisation of the unfunded Source: Author’s own 82 83 Kelly DePonte. 2.
3 billion. 2. An LP that does not wish to finance its unfunded commitment can buy a GICCO protection for a defined period of time. This structure developed by Probitas and NYPPEX is very innovative but has not yet been implemented. Generally buyers are the previous fund managers alongside a secondary investment firm. This contract transfers the financing obligation (the unfunded commitments) to the buyer of the contract who.9 Tail-end This sale structure refers to the sale of the remaining assets in a fund that is approaching or has exceeded its expected life.0 times the investment made.harbourvest. One of the most recent is that of the Venture Capital group of Lehman Brothers (Lehman Brothers Venture Partners) whose management team and HarbourVest bought in January 2009 for an undisclosed amount84 and called the new entity Tenaya Capital.8 Spin-out The term spin-out is used in the Private Equity secondary market when the buyer acquires an entire portfolio of captive assets.htm. This sale structure is usually accompanied by a stapled secondary given that the fund managers wish to secure interests in subsequent funds in order to continue their investment activity85.com/news_and_events/pressreleases/1029.II. For this transaction NYPPEX charges a commission of close to 2. In this type of transaction the GP seeks to sell the remaining assets of the fund by means of an accelerated traditional sale that preserves the IRR already achieved by the fund. The secondary investor may or may not include the management team in the transaction.55 - NYPPEX has also developed a certain type of derivative contract called NYPPEX GICCO (Guaranteed Capital Call Obligation) that acts as insurance. last accessed: 10 January 2010 85 Campbell Lutyens. 2. provides capital funding and in exchange receives a preferred return on the distributions of about 1. 2008 84 . Characteristics of the Private Equity secondary market . Harbourvest press release: http://www.5 to 2. PEIbooks. should the GP make a capital call during the period of the contract.5% of the unfunded and mostly to the buyer. «The Private Equity Secondaries market: a complete guide to its structure transaction and performance».2. The most famous example of this type of transaction is that of MidOcean Partners which acquired alongside AlpInvest in 2003 the portfolio of assets that their managers previously managed in Deutsche Bank for €1.2.
86 Triago. «The secondary seller’s options». due to the absence of other alternatives. understand the reasons for selling. 2009 and Clark.2 Exclusive sale with a secondary buyer The seller (LP or GP) decides to negotiate with a single potential buyer. and potentially offer better pricing and a tailored transaction. It allows the buyer to obtain more information. However.1 GP option: arrange a sale through the manager This process is only applicable to the sale of limited partnership interests. The LP contacts the GP to discuss his intention to sell the interest and seeks the manager’s assistance in finding a buyer. 2003.3. Figure 29: Comparison of the characteristics of the different sale processes Source: Author’s own. there are different options for accessing the secondary market. Geoffrey. The GP has no obligation to assist the seller in the sale but usually accepts because in this way he can control who is going to be his new LP after the sale. 2. 2009 . «Opportunities and challenges in Secondaries» Goldman Sachs in The Journal of Alternative Investment.3.3. and Christopher Kojima. meet the seller.56 - 2.II. Characteristics of the Private Equity secondary market . The different sale processes86 When selling one or more interests in a fund or funds. «The secondary seller’s options». Generally the manager attempts to sell to the existing LPs of the fund (or of another of the manager’s funds) or to other outside “friendly” investors. 74-86. data from Triago. The limited competition in this process makes it uncertain that the LP will achieve the best price for his interest. execution risk is high. 2. This exclusive process is usually carried out with a buyer with whom the seller already has a good relationship. or selling a part or all of one or more portfolio companies.
The execution of the transaction A typical sale process in the secondary market lasts between two weeks87 and three months and advances through the following stages88: Analysis of the assets being sold according to the buyers’ returns expectations. it allows the seller to receive many bids and make an informed decision on pricing. Furthermore. «The secondary seller’s options». for confidentiality reasons.II. confidentiality and anonymity allows the seller cancel the asset sale (if he does not like the transaction terms) without the market or GP realising the identity of the seller. The selection of the potential buyers is therefore a critical step. Furthermore. Preparation of due diligence documents and of the transaction: syndication. 87 88 Web page Financial Planning. 2. although very similar to the open auction. joint venture.4 Targeted auction This process. «Private Equity gets liquid». Choice of the sale structure and of a suitable process: GP option. However. 2009 89 Moreno-Barberá Participaciones Financieras. etc.3. the seller must manage the flow of information efficiently to ensure that the process is competitive. «El Mercado secundario de capital riesgo». exclusivity. has two notable differences: It is managed by a secondary adviser The name of the seller is unknown to the potential buyers In this process the secondary adviser targets the auction to a group of selected potential buyers and in this way increases the chance of maximising the asset price.3.financial-planning. 2009 Carta Diem.57 - 2. Although this process lacks confidentiality and can be very intense. it may not be used in a direct sale.4. «Private Equity Solutions». limited or public auction.3 Open auction In this process the potential seller organises and manages an auction which is open to many potential buyers. In the second round (the short list) two or three buyers are selected to submit binding bids. www. Verification of the portfolio according to the buyer’s investment criteria89. A typical auction is carried out in two rounds.com. 2005 Triago. Verification of the LPA conditions and of the transferability of the assets. January 2006 . Characteristics of the Private Equity secondary market . 2.
It contains the different rights and obligations of the respective parties and the different operating conditions of the fund. «Trends in the Private Equity Secondary Market». the GP does not exercise its veto right given that a secondary sale typically reduces the default risk of its LPs91. Characteristics of the Private Equity secondary market . when selling an interest it is essential to obtain all legal documentation prior to the transaction.1. «The 2009 Preqin Private Equity Secondaries Review». According to a survey by Preqin published in 2009.II. 2009 . 3.10. when buying or selling limited partnership interests in the secondary market.1 The Consent of the GP90 LPAs generally require the consent of the GP in order to exchange a limited partnership interest. Finalising the documents and negotiations.58 - The process of due diligence in a secondary transaction is crucial to be able to evaluate the quality of the fund’s underlying assets. Closing of the transaction: signing the contract. For this reason. there may be side letters or other such separate agreements which can clarify or modify terms of the LPA. Legal considerations in the revision of the LPA The LPA or formation agreement of a fund describes the structure and characteristics of the fund and governs the relationship between the LPs and the GP. Assistance and coordination with legal advisers and drafting of contracts. Obtaining GP consent for the transaction. 2009 See appendix 7. Additionally. 90 91 Wilmer Cutler Pickering Hale and Dorr LLP. Selection of the bidder through different secondary buyers in the market. Legal and tax considerations A Private Equity fund entails many legal and tax considerations flowing from the limited partnership agreement (LPA) which relate to the transferability of the asset. payment of the final price and change of ownership of the assets. 3.1. For this reason. 94% of managers say that they have never used their right to veto a secondary sale92. it may be necessary to review all legal documentation prior to a transaction. In some cases the GP cannot reject a transaction as long as it does not violate LPA terms but in others consent is left to the GP’s discretion. the existing agreements and to determine a suitable price. which summarizes the meeting with SJberwin (14 December 2009) 92 Preqin. Usually. 3. the quality of the GPs.
these clauses oblige the LP to first offer the interest to the existing LPs in the fund on the same terms as those agreed with the potential buyer. it must be honoured unless the GP waives it (the GP can waive this clause). 3. representations and future commitments. subject assets. Legal considerations in the negotiation of the Purchase and Sale Agreement Once the buyer and the seller agree on price both parties sign a Purchase and Sale Agreement (PSA).3 Legal reporting requirements In the case of a secondary transaction some LPAs require that a legal opinion regarding the transfer be rendered to certify the transaction will not contravene a securities law or tax laws.1. 3.2. they too must be honoured unless shareholders waive them. 3.4 Sale notification requirements The LPA may require prior notification of the sale within a certain time period.5 Payment of costs incurred by the transaction The GP may ask the buyer and selling limited partner to pay the costs incurred by the transaction which is generally limited to the legal fees associated with the Transfer Agreements. When an LP sells their interest. in order to finalize the sale. This clause may delay the closing of the transaction.2 Pre-emption rights: Right of First Refusal (ROFR) In some funds (for example those of Blackstone) the LPA contains a right of first refusal clause. in the case of a direct sale (interest in a company) there may be shareholder syndication agreements with pre-emption rights.II.59 - 3. «Secondary sales of Private Equity interests». Besides the price and subject assets this contract includes key legal terms of the transaction.1. If so. This contractual document specifies the price. This fee is generally split between the buyer and seller. 3. If this requirement exists. Furthermore.1. the new and previous LP will have to notify the GP of the transfer. In practice it is very rare for the GP or his legal counsel to request it93. In any case. Characteristics of the Private Equity secondary market . 93 VCFA group. closing date. 2002 . The new LP will have to comply with the GP’s information requirements and provide necessary information to complete different documents.1.
«Key legal and transactional issues in secondary Private Equity fund transaction». The caps in these refund requirements are often heavily negotiated. In the PSA it is essential to indicate that if these clauses are exercised the seller will compensate the buyer by refunding distributions made prior to the cutoff date. 3. 3. These are funds that must be transferred before having to buy any other funds in the portfolio. «Trends in the Private Equity Secondary Market». They may be divided into two sections: conditions precedent or those acts that need to happen before the contract closes.2. These clauses can vary from broad coverage to more specific points such as the resignation of a key manager. Characteristics of the Private Equity secondary market . 94 95 VCFA group. «Secondary sales of Private Equity interests». In a secondary transaction.2 Material Adverse Change clauses95 These clauses allow a buyer to withdraw from a transaction if the fund (mainly portfolio companies) undergoes substantial changes between the signing and the closing of the transaction.3 Clawback provisions96 Clawback clauses are provisions included in the LPA that require LPs to refund distributions due to special conditions.60 - 3. «Trends in the Private Equity Secondary Market». the normal contingent conditions are the following: Consent of the fund general partner to the transfer Satisfaction or waiver of any rights of first refusal Waiver of penalties regarding any defaults by the seller (such as a late capital call payment) 3. The parties can also agree on a mechanism to calculate the liability for a clawback of funds that are not attributable to a particular distribution according to a pro rata share of the distributions received.II. threshold funds may be identified.2.2. 2009 .2. 2002 Kaye Scholer LLP.4 Threshold funds97 In a transaction involving a portfolio of fund interests. 2009 96 Wilmer Cutler Pickering Hale and Dorr LLP. and conditions subsequent or those acts that need to happen after the contract closes.1 The contingent conditions94 These conditions are those that if not fulfilled cancel the agreed contract. It enables the buyer to acquire only the funds he is focusing on without being forced to buy less attractive interests. 2009 97 Wilmer Cutler Pickering Hale and Dorr LLP.
Although more popular in 2006-2007 it has become less common today due to the supply/demand imbalance in the market.2.7 Stapled transaction clauses100 This clause obliges the buyer to commit to invest in a new fund managed by the same GP in order to obtain the GP consent of the secondary transaction.2.3.3. «L’envol du secondaire». Private equity funds (PEF) are subject to favourable regulatory treatment that exempts them from paying tax on dividends received from portfolio companies or capital gains generated from the sale of companies (elimination of the entitylevel tax). However the seller and the buyer have little room to negotiate with the GP given that the same must consent to the transaction. representations. «Guide to secondary market buyers». Buyers and sellers seek to limit these indemnification requirements. each secondary sale must comply with the taxation regime of the country for which it is considered resident. 3. «Trends in the Private Equity Secondary Market». 3. 2009 . Typically capital gains and losses and net operating income or loss is taxed in the hands of the LP. «Trends in the Private Equity Secondary Market».6 Joint liability: French legal framework99 In France the law considers the seller jointly liable with the buyer for capital calls of the transacted fund interest (in an FCPR) during the two years after the transaction. 2009 Private Equity magazine. 98 99 Wilmer Cutler Pickering Hale and Dorr LLP. 2009 101 Dow Jones.II. The parties must determine the sale does not alter the fund’s tax status or its exemption from registration requirements.1 Taxation of Private Equity funds In most jurisdictions. 3.5 Indemnifications98 General partners request indemnifications for breaches of covenants. and warranties in the sale agreement. August 2008 100 Wilmer Cutler Pickering Hale and Dorr LLP.61 - When sellers are distressed they may use thresholds in an attempt to obligate buyers to purchase less attractive assets when acquiring an interest in a high-quality fund. 3. 3.2. Characteristics of the Private Equity secondary market . Tax considerations101 Besides the LPA. This legal provision requires the parties to reach an agreement on this particular issue when drafting the PSA.
The future of the market Empirical demonstration: The primary market drives the secondary 4. Characteristics of the Private Equity secondary market . 2009 .2 The United States: the 2% law102 In the USA. ii. must verify the volume of transferred interests in the fiscal year to ensure that it complies with regulation and that the transaction can take place. under IRS regulation (section 1. the author has developed a model to identify the relationship between the two markets. A QMS provides management services for a secondary transaction. As mentioned in 1.II. Block transaction A fund may allow a transaction of more than 2% of the fund’s capital commitment if the transferred interest represents more than 2% thereof. «Guide to secondary market intermediaries». 4.1. In consenting to a transfer. no more than 2% of a private partnership’s capital commitment can be transferred each fiscal year without the partnership being considered to be publicly traded. A Qualified Matching Service is approved by the tax authorities and allows exchanging an additional 8% of the fund’s capital commitment.3. the GP will make sure it complies with tax laws in order to protect the fund’s fiscal status. such as in the sale of an interest due to the death of its owner or between family members. before initiating a sale of interests. i. Should this rule be broken the partnership will be deemed a corporation thus losing the benefits of a flow through entity. For this reason an LP. In order to produce future growth predictions.1. 102 Dow Jones.3.62 - 3. Other exemptions to this 2% law are applied in some specific cases. The Qualified Matching Service Transactions in a fund can only be carried out between qualified investors and limited partner transfers may only occur among 2% of the fund’s capital commitment unless they occur via a Qualified Matching Service (QMS).7704). there seems to be a mathematical relationship between funds raised in the primary market and transaction volume in the secondary market.
Characteristics of the Private Equity secondary market . Analysis of these data and the projections model are available in appendices (8 and 9).7 8 5% 0. This average transaction age of a fund is justified by historical averages that have fallen over time (they were previously above 5 years. By multiplying the probability percentage by funds raised in the primary market in the corresponding years.0 10 0% 0. the potential volume of primary commitments that are likely to be sold in the secondary market can be deduced.3 4 20% 0.8 5 30% 1. Model available in appendix 9.63 - 4. Table 4: Distribution of the transaction probabilities during the life of a fund Year of fund Probability the 1 0% 0.0 Total 100% 5. This potential transaction volume will be called the secondary base. today they are closer to 4.5 years). In order to identify a relationship between the secondary and primary market. The model analyses the historical relationship between primary fundraising volume and transaction volume in the secondary market in order to determine a correlation that allows future estimates to be made.5 6 20% 1.0 2 5% 0. The analysis focuses on primary fundraising and on transaction volume in the secondary market.4 9 0% 0. primary commitments most likely to be transacted on the secondary market were determined. The commitments most likely to be sold are those between three and seven years old being the most often exchanged in the secondary market. Based on a study by Cogent Partners: «Secondary market model projections» (2006) and a study by Alex Sao-Wei Lee: «Private Equity secondary funds and their competitive strategies» (2003) 103 .2 7 10% 0.1. It was assumed that transactions will take place over the life of the fund with the following probability distribution.II.1 3 10% 0.0 Year average Source: Author’s own This distribution hypothesis is designed to target an average fund age of 5-years.1 Secondary market projections model103 The model is based on an analysis of historical data between 1995 and 2009 (globally).
an average of 6. it is a conservative hypothesis that allows factoring the possible decline in investment by financial institutions in Private E Equity due to new regulations (Basel II. Based on this fundraising data.2% of the secondary base was exchanged in the secondary market.2 Historical relationship between the secondary base and the relationship volume in the secondary market Upon comparing the historical data of the secondary base with the secondary transaction volume between 1995 and 2009.64 - 4. analyze 2003-2008 in which 7.1. the mathematical relationship was not maintaine due to maintained the crisis in the financial markets that prevented the natural turnover of primary assets towards the secondary market. it was assumed that volume raised in the primary market will remain constant after 2009. Since 2009 was an atypical year. the last relationship was not maintained.4% of the secondary base was exchanged in the secondary market. Figure 30: Secondary base (in bn$) 400 350 300 250 200 150 100 50 0 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Source: Author’s own . the secondary base is calculated. two trends stand out: From 1995 to 2002. 2008 4. an average of 3. For this reason it is also interesting to analy the period market. that is between 2010 and 2013 the primary fundraising volume will be the same as in 2009.II. From 2003 to 2009.3 Secondary market transaction volume: 2010 2010-2014E In order to be able to estimate volumes within the next five years. Characteristics of the Private Equity secondary market cs . “Volcker Rule”). Since 2009 was a e tough year for primary fundraising in Private Equity.4% of the secondary base was exchanged.1.
6%) 20 15 Base case (6. Characteristics of the Private Equity secondary market . 2010 (2009)/ Author’s own projections. This assumption which represents the base or most realistic case estimates a compound annual growth rate (CAGR) of 16% in the volumes exchanged on the secondary market. and acceleration of capital calls) and the new regulations in force (Basel II. “Volcker Rule”). «Guide to Secondary Market Buyers». If this trend is confirmed. it is forecast the market will represent an average of $20 billion per annum during the next five years.4% of the secondary base was exchanged in the secondary market. The present upside case uses the turnover rate of the assets for the period 20032008. the market will grow 19% per annum (CAGR) and will represent an average of $22. According to this scenario. This hypothesis is very conservative given that it does not take into account the new dynamic of the secondary market. Figure 31: Estimates of the secondary market transaction volume according to the historical relationship ($ billions) 30 25 Downside case (5. «Adams Street Secondary Networking Event». . 2009 (1996-2008)/ UBS Private Funds Group.II.6%.2%) Secondary transaction volume 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 10 5 0 Source: Author’s own using data from: Dow Jones. Taking this hypothesis of a 7.5 billion per annum of secondary transactions during the next five years. It estimates a compound annual growth rate (CAGR) of 13% in volumes transacted in the secondary market which translates to an average of $17.2% turnover rate allows taking into account the different future growth catalysts that have appeared mainly due to the crisis effects (denominator effect. The base case uses the most recent trend from 2003 to 2009 in which 6.4%) Upside case (7. financial pressure on investors due to a fall in distributions.65 - The present downside case assumes a historical turnover rate for the period 1995 to 2009 of 5.5 billion per annum in the next five years.
this model demonstrates that the primary market has been the historical driver of the secondary market. «LPs rush for exits. known as the “denominator effect”.5 and $22. at the end of 2010 31% of American investors and 15% of European investors forecast having Private Equity commitments higher than their allocation targets107. changes in investment strategy. Future growth catalysts As stated. 4. Characteristics of the Private Equity secondary market .II. This verified relationship allows us to estimate that the secondary market should witness an average transaction value of between $17.2. «Global Private Equity LP survey – Q3 2009».66 - This historical relationship is used by different market participants to estimate secondary dealflow potential. 2009 107 Coller Capital.reuters. This phenomenon. www. overwhelming secondary market». 2009 105 104 . due to the historical relationship and the large volumes raised in the primary market in the last few years. it must be noted that although these projections are based on the existing relationship of historical data. and need for liquidity. 15 December 2008. But what will be the main catalysts of this growth in the secondary market? 4. at the end of the third quarter of 2009 20% of investors in Private Equity (except secondary funds and fund-of-funds) were overexposed to the asset class and may lead to an increase in secondary market opportunities106.5 billion per annum over the next five years (2010-2014)104. In conclusion.2. «Global Private Equity Barometer .Winter 2009».5 and $22. This relationship relies on the main driver of the secondary market: the natural turnover of primary assets in the secondary market due to portfolio management. However. According to a survey by Coller Capital. the model is somewhat limited due to the uncertainty of the historical data. the percentage of other assets in portfolios including Private Equity funds has increased on a relative basis exceeding the asset allocation constraints of many institutional investors. Reuters. if the historical relationship is maintained it is forecast that market transactions will represent an average of between $17. Ari Nathanson.com (Last accessed: 6 November 2009) 106 Fidequity.5 billion per annum during the next five years.1 The “denominator effect” Since public market valuations fell. Using the estimates of the downside and upside cases of the projections model. has forced many investors to restructure their portfolios leading to the potential for sale of LP interests105. According to a survey by Fidequity.
Other pension funds and insurance companies over-allocated to this asset class have also forced some GPs to lower their NAVs in order to reduce their total exposure to this asset class.67 - Figure 32: LPs’ anticipated level of Private Equity commitments at the end of 2010 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% North American LPs European LPs Asia-Pacific LPs Lower than target allocation Equal to target allocation In excess of target allocation Source: Author’s own based on data from Coller Capital. 2009 . the pension fund CalSTRS had an allocation of 14. 2009. some investors. However. 2009.Winter 2009». Figure 33: Plans to address the over allocation issue Consider sale on the secondary market Wait for problem to correct itself through "numerator" effect Increase allocation Fund-of-funds Wait and see Investors in Private Equity (except fund-of-funds and secondary funds) 0% 20% 40% 60% 80% Source: Author’s own based on data from Fidequity.4% of its portfolio when the threshold for this asset class was only 11%. «Global Private Equity LP survey – Q3 2009». «Global Private Equity review». have increased their Private Equity allocation (for example. Characteristics of the Private Equity secondary market . in order to rebalance their portfolio. they finally increased their allocation limit to 15%108).II. «Global Private Equity Barometer . 108 Preqin.
com.theinvestoraudit. Under this rule banks will only be allowed to invest up to three percent of their total Tier 1 capital in alternative investments.cotizalia. President Obama’s bill called the “Volcker Rule” was approved on the 20th of May by the US senate and became a law on the 21st of July 2010. 25 June 2010 109 . 4 February 2010. «Senate-House Conference Agrees on Final Volcker Rule». i. 2008 111 See appendix 7.2 The new requirements of the financial institutions Banks and other financial institutions are selling more and more Private Equity assets due to a desire to strengthen their balance sheets in order to comply with the new solvency ratio requirements and the recently approved Volcker rule. This bill could result in the secondary sale of proprietary investments in Private Equity of many banks.0x to 3.0x110. Tier 2) banks have to strengthen their balance sheets by increasing capital resources or selling assets. Ignacio.13 which summarises the call to Campbell Lutyens (10 March 2010) 112 Hoflich Peter. It is estimated on the balance sheets of the six largest American banks and AIG there is currently more than $130 billion invested or committed in Private Equity funds for sale109. «The search for liquidity focuses on disposing of illiquid assets».2. Tier 1. With exposure to be capped at three per cent Sarría.II. http://www. Private Equity assets weigh between 190% and 400% (depending on the regulator in each country and on the interpretation of Basel II) of their NAV more than their unfunded part111. have now become expensive to own for the banks who had generally invested in this asset class as a means to win business with the funds (“pay-to-play funds”) but have never considered these to be strategic assets112. the cost of financing Private Equity investments has been multiplied by approximately 2.68 - According to a survey by Fidequity carried out in the third quarter of 2009. 4. “Volcker Rule”: the 3% rule113 In 2010 regulatory changes will be a key element that will have to be monitored. Private Equity assets. www. 14 April 2009.com/ (last accessed: 05 de February 2010) 113 Davis Polk & Wardwell LLP. «Impact of the credit crunch on the secondaries market». Basel II Since the implementation of the new Basel II accords which modify the weighting of assets. in addition to being illiquid. ii. Characteristics of the Private Equity secondary market . (last accessed: 13 January 2010) 110 Greenpark Capital. only 10% of investors in Private Equity (except secondary funds and funds of funds) and 22% of the funds of funds considered accessing the secondary market to solve their over allocation to Private Equity. In order to comply with the solvency ratios (CT1. «¿Qué pasa en el mercado “secundario” de capital riesgo?».
Characteristics of the Private Equity secondary market . banks can benefit from another five year extension to divest interests in so-called illiquid funds. The table above provides an estimate of the capacity the five major US banks have to make proprietary investments in alternative funds.7 131 3. The other aspect of the rule would prevent banks from owning a commitment that represents more than three per cent of the fund’s total capitalization which will force many banks to sell part of their holdings in Private Equity funds.II. Also. In reaction to the credit crunch merger and acquisition volume decreased and IPO exits have become challenging due to financial market volatility. Also this could result in Goldman abandoning its Bank holding charter so as to avoid the Volcker rule.69 - many banks will be forced to sell off Private Equity assets mostly by spinning out their Private Equity investment group (such as Citigroup did in July 2010) or wait and allow the funds to harvest their investments and wind-down. Table 5: Tier 1 capital and 3% cap of five major US banks (in billions) Tier 1 BoFA ML JP Morgan Citi Goldman Sachs Morgan Stanley 3% of Tier 1 155 4. funds are selling fewer assets which do not allow them to make significant distributions to their investors. It demonstrates this limit is likely to force banks such as Goldman Sachs to divest assets from its Private Equity investments.5 Source: Author’s own based on data from Q1 2010 financial statements.0 49 1.9 119 3.6 68 2. . 4. Therefore. Banks would have two years to comply with this new rule and can qualify for an additional period of three years.2. Essentially banks may have up to ten years to divest Private Equity assets.3 An increasing pressure on the investors: fall in the distributions combined with an increase in the capital calls Historically low distributions combined with increased capital calls will increase the financial pressure on LPs.
However since economic indicators are improving GPs are expected to accelerate capital calls within the coming months which. According to a study by Cogent Partners.70 - Figure 34: Distributions as a % of NAV Source: JP Morgan Asset Management. 2009. 2009 Permal Capital Management LLC. August 2009 116 Fidequity. capital calls in the first quarter of 2009 represented 24% of those made in the fourth quarter of 2007114. Thomson Financial/ VentureXpert. 114 115 Cogent Partners. «Private Equity observations-Golden age of secondaries?». According to a study by Fidequity in 2009 more than 80% of traditional and non-traditional investors forecast that GPs were going to increase the pace of capital calls in the next 12 months116. «Secondary Private Equity Discussions». Economic uncertainty combined with the high volatility of the markets has slowed the pace of the capital calls. «Global Private Equity LP survey – Q3 2009». will increase financial pressure on LPs115. Characteristics of the Private Equity secondary market . combined with historically low distributions. 2009 .II. «Cogent Research: First Quarter 2009 Valuation and Cash Flow Analysis».
IESE. According to a survey by Coller Capital it is likely that 10% of LPs will not be able to comply with their financing requirements within the next two years117 dramatically increasing their need for liquidity. Inc.2.4 The improving economic outlook After the economic crisis that began in 2007 and following the bankruptcy of Lehman Brothers. the net asset value of the underlying assets is stabilising. Coller Capital. 2009 118 117 . 2009. This environment allows for greater optimism regarding investee companies prospects and their respective valuation reducing the risk of investments in Private Equity (primary and secondary). the rescue of many banks and insurance companies gave way to great uncertainty in the markets. Due to this improved outlook.. «Global Private Equity Barometer . 4. these LPs are likely to seek liquidity by accessing the secondary market118.II. Since March 2009 macroeconomic indicators have improved and the public markets have rebounded reflecting better economic conditions.71 - Figure 35: Anticipated changes in capital calls in the next 12 months Moderatly increase Significantly increase Non-traditional Moderatly decrease Traditional Significantly decrease Stay the same 0% 20% 40% 60% 80% Source: Author’s own based on data from Fidequity. Companies can now look forward to stabilisation or growth. 2009 The Boston Consulting Group. in order to prevent default. «Driving the shakeout in private equity: The role of investors in the industry’s renaissance».Summer 2009». «Global Private Equity LP survey – Q3 2009». Characteristics of the Private Equity secondary market . Therefore.
3. In order to understand when this spread can be reduced one must analyze its causes. «Private Equity Secondary Funds: Are They Players or Opportunistic Investors?». it remains an issue. The lag of the NAV 121 See 4.9 which summarise the call to Breslin (2 December 2009) and Campbell Lutyens (10 December 2009) 119 . When market valuations increase.4. An increasing pressure on the investors: fall in the distributions combined with an increase in the capital calls 122 See appendix 7. only 20% of secondary investment opportunities which came to market in the second half of 2008 actually closed119. 9 August 2009. As the outlook improves.II. Indeed. As macroeconomic and market conditions are improving.5 The bid offer spread is reduced In 2008-2009. This difference is due to timing (the so-called lag of the NAV120) and the managers’ valuation methods. the spread between bid and offer prices prevented many transactions from being executed. the valuation imbalance (1) is reduced.edu/ (last accessed: 20 December 2009) 120 See section III. Finally. For all these reasons. The closing rate for transactions was very low and limited the transaction volume in the market. The spread has three major explanations: The valuation imbalance: This imbalance is attributable to the lag between the NAV and the market value. According to AlpInvest Partners.72 - 4. which also reduces the traditional bid/offer spread (3). we can see the components of the spread are reduced which subsequently reduces the bid-offer spread.3.wharton.2. Although this gap has been narrowing since the application of rule FAS 157. the outlook for the portfolio companies improves as do their fundamentals. more than 80% of Wharton Knowledge. the natural imbalance (2) due to uncertainties in the economic environment is also reduced. 3.upenn. According to a survey by Fidequity in 2009.3 and 7. Characteristics of the Private Equity secondary market . financial pressure increases on sellers. The traditional mechanical imbalance in each market between seller and buyer. Buyers reflect the improvement in the companies’ fundamentals and the reduction in risk by increasing their valuations. due to the reduction in distributions and increased capital calls121. When public valuations are falling the value of Private Equity investments fall as well creating a difference between the real market valuation and the last published net asset value (NAV) of the fund. this spread reduced at the end of 2009122 and will be sufficiently reduced in 2010 to increase deal flow. The uncertainties of public market and global economic outlook. http://knowledge. This chasm between buyer and seller pricing expectations prevented many transactions from being carried out in the short term and was the greatest constraint for the period 2008-2009.2.
According to a study by Coller Capital.73 - traditional and non-traditional investors forecast this spread will have fallen enough at the end of the first half of 2010 to be able to stimulate deal flow123. 2009 124 123 . 32% of limited partners intend to increase their allocation to secondary funds within the next two years125. «Private Equity Secondary Funds: Are They Players or Opportunistic Investors?».II. Characteristics of the Private Equity secondary market . Fidequity. http://knowledge. The sellers and the fund managers (GPs) must also have realistic pricing expectations reflecting future value rather than historical market valuations124. Fund managers must value their investments in a fair manner (fair value) to avoid creating an imbalance between the valuations. participants will be able to agree on valuations and deal flow will be able to grow to never-before-seen levels in this market. 9 August 2009. 2009. When the spread is reduced.wharton. «Global Private Equity LP survey – Q3 2009».Winter 2009-2010». «Global Private Equity LP survey – Q3 2009».6 A market that is becoming a more important asset class for investors Investors are increasingly attracted to this asset class due to its growth and opportunities. 2009 Wharton Knowledge.edu/ (last accessed: 20 December 2009) 125 Coller Capital. «Global Private Equity Barometer . Figure 36: Timing of the tightening of the bid/offer spread Q3 2009 Q4 2009 Q1 2010 Q2 2010 Traditional Q3 2010 Q4 2010 2011 or later Never 0% 5% 10% 15% 20% 25% 30% 35% 40% Non-traditional Source: Author’s own based on data from Fidequity.upenn.2. 4.
II. structured transactions are the subject of growing interest given current risk aversion126. «Secondary capabilities» (Pitchbook). 4. However. these sophisticated structures do require the use of an experienced adviser.74 - Figure 37: Anticipated changes to LP’s exposure to secondary funds over 2010-2011 No plans to invest 26% Increase 32% Decrease 5% No change 37% Source: Author’s own based on data from Coller Capital. 2009. it allows for maximization of transaction value for the seller without impairing the investor’s returns. 126 UBS Private Funds Group. Characteristics of the Private Equity secondary market . Ever more structured operations According to UBS’s secondary advisory team.3. Furthermore. «Global Private Equity Barometer .Winter 20092010». 2009 . A well-structured transaction provides desired liquidity. allows maintaining relationships with GPs. and minimizes accounting impacts of the transaction.
PART III: Valuation in the Private Equity secondary market .
1. Since 2003 Cogent Partners has published an annual. Historical market valuations 1. medium and lowest bids from the first rounds of received offers. analysis of Private Equity secondary market valuations. Transactions: historical valuation 1.1. Given that transactions of direct interests in portfolio companies are valued according to well established valuation methods. and since 2008 a biannual. These market valuation analysis reports128 are reference points and provide us with the result of bids that Cogent has received for the assets that it has placed in the market for its clients. it was decided that data from the secondary advisory firm Cogent Partners’ would be used. 1. this section will concentrate on the valuation of limited partnership interests and intends to provide a reliable guide to valuation in the secondary market.1 General trend After an analysis of the available data on secondary market valuations127. . 127 128 Analysis in appendix 10. Historical valuations in the secondary market by asset type See Cogent Partners «Secondary Pricing Trends and Analysis» available on Cogent Partners’ website 129 The valuations de the Private Equity portfolios (NAV) are usually published each quarter. Valuation in the Private Equity secondary market . VALUATION IN THE PRIVATE EQUITY SECONDARY MARKET This section focuses on valuation in the Private Equity secondary market. Since this company’s dealflow is the largest among all the advisers (in terms of number of transactions). The reports provide the average of the best. the information provided in these reports allows us to glean an accurate valuation of the market.76 - III.III. The valuation in relative terms measures the value of the bid in relation with the asset’s last published NAV129.
Given that the least funded interests entail greater unfunded commitments for buyers. However.III. the value of the last published NAV plus the unfunded part of the asset)130. Valuation in the Private Equity secondary market . 2010 . «Secondary Pricing trends & analysis.77 - Figure 38: Secondary bids over time (as a % of last fund’s NAV) 110% 100% 90% 80% 70% 60% 50% 40% 30% 2003 2004 2005 2006 2007 H108 H208 H1 09 H2 09 H1 10 Average High Average Median Average Low Source: Author’s own using data from Cogent Partners pricing analysis (2007-2008-2009-2010). this analysis does not take into account the funds’ funding ratios and can therefore be altered by a change in the mix of the assets placed in the market. In order to overcome this effect it is necessary to compare the value of the bid plus the unfunded part with the total value of the exposure to the asset (that is. The figure above portrays the historical trend in the secondary market and the spread in the different bids. 130 Cogent Partners. January 2010».6% of NAV. One can clearly see a very large increase in valuations from the first half of 2009 to the first half of 2010 at 79. the application of a discount on this unfunded part (that must be funded at nominal value) mathematically entails an even larger discount on the asset’s NAV.
It would therefore be important to compare the valuations over time across the different fund types according to whether they are leveraged buyout funds (LBO). We can also observe that the recent increase in secondary valuations is not due to a change in the mix of the assets but rather is based on a real increase in the valuation of the underlying assets. Upon comparing the two analyses in the graph above.III.2 The valuation depends on the type of asset Depending on economic conditions.78 - Figure 39: Value of the best bid in comparison with the total exposure to the asset (NAV + unfunded) 110% 100% 90% 80% 70% 60% 50% 40% 30% 2003 2004 2005 2006 2007 H108 H208 H1 09 H2 09 % of NAV % of total exposure Source: Author’s own using data from Cogent Partners pricing analysis (2007-2008-2009). This analysis removes the effect of the change in the mix of the assets available in the market. we can clearly observe the effect of the credit crisis that increased the mix of highly unfunded interests sold in the market. each type of asset behaves in a different manner.1. Given the liquidity squeeze that has affected many institutions since the market downturn in 2007. This has led to many highly unfunded limited partnership interests being offered in the market. Venture Capital funds. 1. the current trend seems to be following the historical trend. Therefore. many institutions have wanted to get rid of the unfunded commitments on their balance sheets. Valuation in the Private Equity secondary market . . Furthermore it may be highlighted that the current valuation slightly exceeds that of 2003 when the market rebounded after the technology bubble burst. infrastructure or distressed assets. or other funds investing in real estate.
Since investors generally do not know in which assets the unfunded commitment is going to be invested it represents a “blind pool” that conveys an additional risk producing a negative effect on valuation. Clearly.4% of their NAV) due to the impairment of many portfolio companies in these funds which are highly leveraged and therefore have a high default risk in difficult economic conditions combined with high refinancing risk. the value of leveraged buyout funds has been lower (68. This ratio measures the capital funded by the investors against the total commitment of the investors in the fund. there tends to be a positive correlation between the funding ratio and valuations. .79 - Figure 40: Historical valuation of the best bids received for each fund type (% of the NAV) 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 2005 2006 2007 H108 H208 H1 09 H2 09 LBO Venture Capital Others (Real estate. 1. Valuation of the funds is therefore driven by valuation of the underlying assets. infrastructure.9% of their NAV) than those of Venture Capital (75. Although sector specific valuations for the years 2003-2004 are not available. Furthermore.3 The valuation depends on the funding ratio The valuation of an asset in the secondary market largely depends on its funding ratio. the period after the technology bubble burst stands out with the low valuation of Venture Capital funds that reflect the fall in the valuation of these funds’ underlying assets. Since 2009. We may also highlight in the graph above a trend for each type of asset exchanged in the secondary market. there is an overall trend in the secondary market. distressed) Source: Author’s own using data from Cogent Partners pricing analysis (2007-2008-2009). Valuation in the Private Equity secondary market .1. This is due to the fact that underlying assets of each fund evolve differently according to economic cycles. since the buyer will have to assume this commitment at its nominal value if acquiring a fund interest.III.
4 The valuation depends on the vintage year of the fund As well as depending on the type of asset or on the funding ratio. 2009. 2009 .7% 36. In addition. After a period of fundraising a fund enters the investment period which is usually five years.2% 51.III. Depending on where in the economic cycle the fund places investment. «Secondary Pricing analysis interim update.7% >50% funded 42. the valuation of a fund also depends on its vintage year. 1. summer 2009». a fund with a more recent vintage year would typically have a larger unfunded commitment for its investors (or a lower funding ratio) when compared to a fund with an older vintage year. «Secondary Pricing analysis interim update.0% Source: Author’s own using data from Cogent Partners. The table above demonstrates that leveraged buyout funds follow this correlation unlike Venture Capital funds. it may be investing funds at high or low company valuations which directly affect its future returns.1. The additional discount applied to mature Venture Capital funds can be explained in that buyers discount the risk these mature funds will not have enough capital to fund next rounds of financing if required by their portfolio companies. 131 Cogent Partners.80 - Table 6: Effect of the funding ratio on the valuation (H1 2009) Average of the best bids (% of the NAV) <50% funded LBO Venture Capital 27. Valuation in the Private Equity secondary market . summer 2009». For this reason the GPs of these funds will have to invest in these companies from subsequent funds or may need to raise annex funds that usually have preferred conditions131 and are more dilutive.
Example: Pantheon International Participations.1 . 2007 is the only vintage year that is affected by both issues132.III. Upon analysing the graph above. These valuations may be explained by the fact that while 2006 vintage funds paid higher multiples for their investee companies and 2008 vintage funds have a low funding ratio. Example: HgCapital. 2009 Listed Private Equity Association. There are two broad types of listed Private Equity funds: Listed funds that invest directly134: These funds invest directly in companies that together constitute a Private Equity portfolio. «Secondary Pricing analysis interim update. Fund of funds135: These funds invest in a portfolio of Private Equity funds that then invest in companies. 2009 134 See scheme available in appendix 11. summer 2009». «Eight Steps for analysing Listed Private Equity Companies».81 - Figure 41: Valuation according to the vintage year of the fund (H1 2009) in % of its NAV 2008 41. 2009. summer 2009».2. it highlights the low valuations for the vintage years 2006 to 2008 with 2007 being the lowest (26. «Secondary Pricing analysis interim update. without needing to invest much money or be an institutional investor. Valuation in the Private Equity secondary market .7% 2005 and before 43. 132 133 Cogent Partners. average of the best bids received for all the funds.2.1% of the NAV). Listed Private Equity funds 1.1% 2006 39.1 Concept133 Listed Private Equity funds are listed vehicles that allow participation in Private Equity investments in unlisted companies or in fund portfolios. 1.3% 2007 26.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Source: Author’s own based on data from Cogent Partners.
F&C Private Equity B Trust.2. Upon comparing the trading average of some listed vehicles with their last published net asset value (NAV) it appears they can be useful in approximating valuation in the Private Equity secondary market. these funds on average were trading at 66. Pantheon International Participations. Graphite Enterprise Trust. After comparing the historical trend of the trading average of some listed Private Equity funds to the best bids received in secondary transactions it is apparent there is a very clear correlation. 1. Valuation in the Private Equity secondary market . See scheme available in appendix 11.2 Historical trading: a proxy towards the valuation in the secondary market Since these listed funds are invested in Private Equity assets. Private Equity Investors plc. Thomson Datastream (19 July 2010) . Electra Private Equity Investment Trust. Standard Life European Private Equity Trust. Northern Investors Company. Mithras Investment Trust. they usually represent a good proxy for valuation in the secondary market. HG Capital Trust. and SVG Capital. the manager usually has the same name as the listed fund (F&C Private Equity managed by F&C Asset Management).2 The index includes the following listed Private Equity funds: Candover Investment Trust. Dunedin Enterprise Investment Trust. Figure 42: Historical trading of the listed Private Equity funds – Premium / (discount) with its NAV Source: UBS.III.4% of their NAV (that is. with a 33. 136 As of the 19th of July 2010. F&C Private Equity A Trust. Listed funds that are invested directly are usually managed by an investment firm that may be related to the listed vehicle (Beteiligungs AG) or not (Standard Life European Private Equity). Prelude Trust plc.82 - There are also hybrid funds such as Graphite Enterprise or Electra Private Equity that invest directly and indirectly (through Private Equity funds) in companies. 136 135 .6% of discount). even if the listed vehicle has no ownership interest in its investment firm. New Star Private Equity. In any case.
i.III. developed an algorithm that provides price indications for interests in the market by using the trading activity of listed Private Equity funds.3 Limits of comparison with the Private Equity secondary market138 The use of trading activity of listed Private Equity funds provides an approximation of value in the secondary market. It has demonstrated a correlation between trading of these funds and their valuations in the secondary market. Other). fund’s track record. However.4 which summarises the email from Preqin (2 December 2009) See appendix 7. The valuation depends on the underlying asset The valuation of a limited partnership interest or of a portfolio company depends on each type of asset according to its investment targets (LBO. vintage year. a firm that undertakes studies and maintains databases of the secondary market. in order to accurately estimate the real value of these assets. funding ratio. 1. the following elements need to be considered: fund type (VC/LBO/ Other). vintage year. it integrates components that distort its value and limit the chances of precisely valuing assets in the secondary market. management team and the quality of the portfolio’s assets.9 which summarises the call with Campbell Lutyens (10 December 2010) .2. GP’s historical returns. Preqin. VC. funding ratio and market effect137. Valuation in the Private Equity secondary market .83 - Figure 43: Comparison between trading of listed Private Equity funds and bids received in the secondary market 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 2006 2007 H108 H208 H1 09 H2 09 H1 10 Listed Private Equity funds Average highest bid on the secondary market Source: Author’s own using data from UBS and Cogent Partners pricing analysis. 137 138 See appendix 7. However.
III.84 - ii. iv. It is distorted by the general mood of the market (bearish/bullish) and the effects of more or less liquidity in the market. iii. when the pace of distributions falls and capital calls increase it may put the fund in danger of not fulfilling its obligations due to investor capital call default. they commit more money to the underlying funds than they have to finance their capital calls. This effect. That is. Valuation in the Private Equity secondary market . called leverage effect. However. Use of leverage Listed Private Equity funds are usually leveraged vehicles that allow maximization of returns in bullish markets but may have the opposite effect in bear markets. This allows for an increase of the investor’s returns by reducing the negative effect of the cash drag (negative effect of un-invested money) on returns and by efficiently managing the investor’s resources. can distort the trading value of the fund. the use of trading activity of listed Private Equity funds may not be an entirely accurate measure of the real value of secondary assets. particularly those invested indirectly (funds of funds). In view of these limitations. Over-commitment strategies Listed Private Equity funds. . Market effect The trading of Private Equity funds is distorted by market effects. In bullish economic cycles this strategy significantly improves returns. This strategy is based on the fact that since not all commitments are called for at the beginning of the life of a fund investors can attempt to finance future capital calls with distributions from other funds. It does however allow approximating the general trend of the market. usually employ an over-commitment strategy in the underlying funds.
Other). . management team track record and fund returns. In the secondary market this can be done by two main methods: Valuation by comparable transactions Valuation by the historical trading of listed Private Equity funds As a traditional valuation using multiples a universe of funds with similar characteristics must be established. Figure 44: Two valuation methods of the secondary assets Source: Author’s own using data from Clark. How to theoretically value this asset When valuing a limited partnership interest there are two valuation methods. The top-down method consists of applying the current discount/premium present in the secondary market to the last published NAV of the fund manager. Characteristics would include investment style (VC. vintage year. funding ratio.1. 74-86. 2.1. The bottom-up method can only be applied if the information necessary to value the asset is available. Goldman Sachs in The Journal of Alternative Investment.III. «Opportunities and challenges in Secondaries». Geoffrey.85 - 2. 2. and Christopher Kojima.1 The transaction or trading value/NAV ratio Both methods are based on applying the average existing valuations or the trading value divided by the most recent value of the asset (NAV) to the net asset value of the asset that we wish to value. 2003. the bottom-up method is based on the intrinsic value of the fund’s underlying assets and values the interest by discounting its cash flows. Valuation in the Private Equity secondary market . Top-down method This method focuses on valuing assets using the current market valuation. In contrast. LBO.
The ratio is calculated by dividing the total value of the fund (market capitalisation + debt) by its last published NAV. 2. Valuation in the Private Equity secondary market . there may be different ways to value the assets and calculate the NAV. the ratio is applied in this transaction and corrected for further capital calls or distributions that have taken place after the transaction. transactions of comparable funds in the last quarter are researched in order to compare NAVs for the same quarter and since NAVs are usually published quarterly.1. 2.3 The valuation method by the trading multiples After having determined the characteristics of the fund to be valued. «International Private Equity and Venture Capital Valuation Guidelines». September 2009 . If an interest in the same fund was exchanged.III. present research. Currently managers use very similar methods to calculate the NAV of their fund given that organisations such as the IPEV (International Private Equity and Venture Capital Valuation) in Europe or the PEIGG (Private Equity Industry Guidelines Group) in the United States have created Private Equity fund valuation guides which strongly influence the general method to be followed in calculating the NAV of portfolio assets139. theoretical and practical knowledge.2 Comparable transactions method After having determined the characteristics of the fund to be valued.2.86 - However. This ratio is then be applied to the last NAV of the fund to be valued. assuming enough public information. The result is a valuation model that can be used to value a limited partnership interest in a Private Equity fund. Bottom-up method: the valuation model In this method the value of a limited partnership interest will be determined by using the fundamental value of the fund’s underlying assets and the fund’s individual characteristics. listed Private Equity funds with similar characteristics are researched. and interviews with market participants.1. For this reason one must first check that the NAV used in the valuation reflects the real value of the underlying assets and that they are valued in the same way as comparable funds. September 2009 IPEV. «International Private Equity and Venture Capital Valuation Guidelines». 139 140 IPEV. The ratio of the price paid divided by the NAV of these comparable transactions (Price/NAV) is determined and this ratio applied to the last published NAV of the fund to be valued. 2. depending on the manager and the LPA. These considerations are based on the valuation guidelines developed by the IPEV140 (International Private Equity and Venture Capital Valuation).
used by the majority of secondary market investors. downside). the cash flows are adjusted according to distribution priority or “waterfall” of the fund and then discounted at the target gross rate of the secondary investor. Underlying investments and the unfunded commitments are projected over time and a timing of the fund’s cash flows (capital call. how much the investments are worth in each year of the life of the fund.2 Valuing the underlying asset The valuation of a limited partnership interest is based on the collective valuation of the fund’s underlying assets.2. After being projected. distributions) is assumed. requires flexibility that allows simulation of different assumptions according to the scenario being analysed (upside.87 - 2. 2. The value of underlying investments needs to be projected over time. Figure 45: Structure of the bottom-up valuation method Source: Author’s own This valuation model. It . base.III. that is.1 Structure of the bottom-up valuation method of a fund’s interest The bottom-up valuation method consists of the valuing the fund’s interest by discounting its future cash flows. Valuation in the Private Equity secondary market .2.
In order to value a leveraged investment over time. we shall focus more on the valuation of the two most important funds types in the secondary market: LBO funds and Venture Capital funds.com/home/login. This paper does not attempt to explain the valuation method for each type of underlying asset. Valuation of investments in Venture Capital Venture Capital portfolio companies generally have limited operational track records. Each year the equity is valued by applying a multiple (EV/EBITDA) to the EBITDA of the company and deducting the existing net debt. i.88 - basically consists of projecting the value of the assets over time by using growth and valuation assumptions. For example. In this valuation model. Loan trading levels can be found on Markit (https://products. The value of the investment is then calculated by applying the fund’s ownership percentage. If the debt is traded at a deep discount it is inferred that creditors do not expect to recover all their money and it is also assumed that the value of the shareholders’ investment has fallen dramatically142. real estate. If the debt financing of the transaction is traded (the company Cortefiel as an example) then current trading levels141 are considered as they provide insight on how company’s creditors view the company’s risk profile. These assumptions must be based on discussions with the managers if possible and if not then on reasonable inferences about the sector using public information.jsp) Clark.markit. They often do not have steady cash flow generation and are valued in a very particular way depending on their activity and business model. This valuation depends on the type of asset: debt or equity. Valuation in the Private Equity secondary market . 2003 142 141 . Valuation of investments in leveraged buyouts (LBOs) Leveraged buyout funds usually have recurring and stable cash flows over time. its strengths and advantages over its competitors. The investor must analyse the company’s business plan. companies that operate websites can be valued with multiples such as EV/Number of unique users or EV/Number of registered users. 74-86. ii. Goldman Sachs in The Journal of Alternative Investment. For this reason. and Christopher Kojima. the quality of the management team and the likelihood of being diluted in new financing rounds. Venture Capital. «Opportunities and challenges in Secondaries». a projection of the operations of the company will be made according to growth assumptions.III. Geoffrey. it is assumed that cash flows serve to repay the debt as projected over time. but rather for a limited partnership interest. leveraged buyout. infrastructure etc.
3 Project the unfunded144 Besides the underlying assets. The unfunded can be invested in two ways: • Follow-on investments: The managers reinvest funds in portfolio companies. the acquisition of a limited partnership interest entails financing commitments. the quality of the managers is key given that they decide on future investments. ii. • The secondary investor usually speaks to the manager about his plans for investing the unfunded in order to be able to project as precisely as possible the returns that may reasonably be expected. called the unfunded commitment.1 which summarises the call to UBS (26 November 2009) 145 Real Deals. Valuation in the Private Equity secondary market . In addition.89 - If a recent corporate transaction exists that allows us to value the company (financing. Last but not least the secondary investor needs to assess if the GP plans to raise further funds since the managers may not be incentivised to achieve high returns in order to facilitate further fundraising145. i. The projection multiples of the unfunded Discussions with different participants in the market provided insight on the projection multiples used to project the returns of unfunded commitments over time. 2003 144 See appendix 7. The quality of a management team is usually evaluated by examining the previous experience of the members of the investment team. Geoffrey and Christopher Kojima. This part.III. New investments: The projection of the returns of these investments is much more subjective and is usually conditioned by the quality of the management team. «Opportunities and challenges in Secondaries». 74-86. Evaluate the quality of the management team (GP) In order to be able to project the returns of the unfunded commitment.2. 2. the risk of that some members of the management team may leave is usually evaluated (a clause called “Key man clause” can be included in the PSA). These Clark. the track record of their previous funds. «Secondaries roundtable 2009». However if this information cannot be obtained it is usually projected according to the quality of the fund managers. Goldman Sachs in The Journal of Alternative Investment. The projection of these investments is similar to the projection of the underlying assets and is fairly objective. 2009 143 . share transaction) then this can be used to value the investment143. and the returns of current fund. must be projected over time in order to estimate its potential returns to value the limited partnership interest.
the timing for different fund’s cash flows then needs to be determined. the secondary investor must speak with the fund managers to understand their capital call/distribution calendar and obtain the most accurate information possible. Valuation in the Private Equity secondary market .4 Bad 1. LBO. If possible.90 - multiples should be used when available information is not enough to estimate returns according to a more objective criterion than the quality of the management team. The table below provides projection multiples for unfunded commitments over time according to the quality of the management team. However it does not pretend to be exact given that it may vary by each fund type (VC.). That is.com (last accessed: 26 January 2010) . size. Basically.2. 146 147 The historical returns usually come from databases such as Venture Expert Cogent Partners.III. called waterfall. www. etc.5 Aggregate the cash flows in the fund’s waterfall Once the underlying assets have been valued over time according to different growth scenarios and unfunded commitments projected throughout the life of the fund. In order to make a prudent valuation an aggressive calendar of capital calls (managers call for the funds very rapidly) and a conservative one for distributions (it takes a bit longer than expected to sell the companies) is usually followed147. Base 1.altassets. and average historical returns146 of the fund type which change over time. the capital calls are cash inflows throughout the investment period and the distributions are cash outflows during the distribution period.4 Determine a timing of capital calls/distributions Once the underlying assets have been valued over time according to different growth scenarios and the unfunded commitments have been projected. one has to add all the cash flows of capital calls and distributions of cash in the accounting structure of the fund according to the previously determined timing. Mezzanine.2. it is necessary to aggregate the different cash flows in the waterfall. If it is not possible to get this information from the GPs a calendar must be estimated.7 1. 2.2 2. Table 7: Projection multiples of the unfunded according to the quality of the management team Quality of the management team Good Return multiple Source: Author’s own based on own survey. «Pricing private equity secondary transactions» 22 July 2002. simulates the capital calls and distributions within the fund’s vehicle. The fund will also have management costs that will be integrated into its structure. This structure.
Center for Private Equity and Entrepreneurship. They usually represent 2% of the assets under management. EBIT). This fee may be fixed or indexed on an indicator (sales. the management fees are usually 2% and are calculated on the total amount committed to the fund until the deployed capital reaches a pre-determined threshold. accountancy. ii. travel costs. During the investment period. For this reason. They will also call for capital in order to cover fund administration and management costs. Fund management costs Throughout its life. This management fee usually evolves throughout the life of the fund. during this period. GPs do not have to seek further investment opportunities and therefore it is assumed that their management fee must fall according to the distributions. During the distribution period. Until distributions outweigh the necessary capital calls. • The fund management fees148 Management fees are defined in the LPA. etc. The fund receives the commission (inflow) and Tuck School of Business . the fund must assume costs that are detailed and explained in the LPA. Valuation in the Private Equity secondary market . the fund managers will gradually call for the capital committed by the investors every time they find an investment opportunity. given that they have not called for all the commitments. the management fees usually fall to 1. «Note on limited partnership agreements».III. GPs may call for less than what was originally committed by the investors (because they cannot find investment opportunities) but cannot call for more unless the investors agree. The three largest categories are the following: • The fund’s annual operating expenses The determination of costs covered by the fund is completed by examining its LPA. which is reduced with each distribution. Capital calls During the investment period. They usually seek to cover the basic administrative costs of the fund: administrative staff. usually the first 5 years of the fund’s life. communications. 2003 148 . • The management fees of the portfolio companies: The general partner also charges the portfolio companies consulting fees. but are actively looking for investment opportunities. The logic is that since the managers do not manage many assets. they will keep calling on investors. tax and legal advice. they are remunerated for their work according to the total amount committed to the fund.5% and are based off the aggregate cost of the portfolio companies.91 - i.
iii. Valuation in the Private Equity secondary market .92 - usually shares it between the general partner and the LPs (“management fee offset”). The part the manager receives is called carried interest. The investor’s hurdle rate is a minimum preferred return that the investor is promised in the LPA. that is: Carried interest rate Hurdle rate Catch up = Total hurdle × 1 − Carried interest rate Hurdle rate . he will receive 20% of the hurdle. If the carried interest is 20/80. The European model of distributions operates as follows: 1. LBO. which divides the distributions on the total of all distributions.) and according to the quality of the management team. The key for determining the costs of a fund is to analyse the fund’s documentation (LPA). The allocation is usually on a 20/80 basis however it varies according to the type of assets managed (VC. The manager then receives 100% of distributions until reaching the agreed upon allocation of the distributions defined by the carried interest (20/80) with the investors. 3. There are two distribution models: the American model. the investor will receive 100% of distributions until an IRR of 8% on investment has been provided for. Currently. Once the investor has recovered his investment then distributions are divided out between the fund manager and the investor. The waterfall Once the fund has been fully invested. which divides the distributions on a deal by deal basis and the European model. 2. this consulting fee is controversial and moving more and more towards the return of all of this fee revenue to the LPs. Therefore. that is LPs receive 80% and GPs 20%. It is usually 8% per annum. This paper explains the European model of the waterfalls. The structure of the distributions (the waterfall) between the managers and the investors is unique to each fund and defined in the LPA. This provides a better understanding of future costs and allows for a more accurate projection of the fund’s future cash flows. funds of funds. The allocation of the fee is usually 80/20. etc. The GP catch-up is a part of the carried interest that the manager receives once the hurdle rate has been paid. Repayment of the principal of the investment and of the costs borne by the LPs. However Private Equity funds usually have a similar structure and allocation of the distributions.III. it seeks to sell its investments during the distribution period in order to distribute sales proceeds to its LPs.
93 - 4. distributions) at a discount rate. The rate used to discount the cash flows depends on the gross returns that the secondary buyer desires.Carried Interest for GP = Distributions to investors Source: Author’s own 2. Valuation in the Private Equity secondary market . This rate changes over time according to economic conditions and perceived risk (operating and financial) but also depends on the buyer’s cost of capital. Other distributions: The distributions that exceed the combined investor hurdle rate and GP catch up are then allocated between the manager and the investors by following the LPA defined allocation of the carried interest (usually 80/20).6 Discount the cash flows by the cost of capital In this part the limited partnership interest is valued by discounting the cash flows specific to the secondary investor (capital calls of the unfunded part. That is. This division of distributions pays investors and the manager on an 80/20 basis in a specific order that allows the investors to achieve a minimum return first and to provide incentive for the managers to achieve good returns.III. It is essential to thoroughly understand the allocation of fund distributions that are being valued in order to project the cash flows the investor will receive. Table 8: Cash flows of the fund and distributions . If the buyer is a secondary fund its cost of capital will depend on returns committed to its investors.Repayment of the principal .Hurdle rate = Cash post hurdle .Waterfall Fund’s cash flow = + = Investment costs Annual operating cost of the fund Management fee Capital funded for the investments and costs Distributions Cash available for distributions to investors .GP Catch up = Cash post Hurdle and GP Catch up available for distribution .2. 80% of the remaining distributions go to the LP and 20% to the GP. .
the quality of the management team. Valuation in the Private Equity secondary market . valuation multiples of the portfolio companies.7 Sensitivity valuation analysis At the end of the valuation process a sensitivity test to different key variables is conducted.94 - According to the survey held with different market participants. at the end of 2009 and the beginning of 2010 this discount rate was about 20% (IRR). The key variables in the sensitivity analysis are the growth scenario figures. 2. Upon multiplying this value by the percentage of the fund’s interest (% of fund’s interest = Commitment of the interest/Total amount of the fund) the value of the interest is derived. .2. This value will be the maximum price that may be offered in order to achieve the return rate sought.III. The aim is to determine the valuation range that can be offered for the asset according to different scenarios. The asset’s present value (NPV) is calculated by discounting the cash flows at the discount rate. and the timing of capital calls and distributions.
In this case. This section applies the theoretical valuation fundamentals developed in the previous sections to a real world case.000. the fund is a €40 million European leveraged buyout fund (LBO).000 2. The fund’s last NAV. Top-down method: market valuation This 2008 LBO fund has a 30% funding ratio and a quality management team. leveraged buyout funds were traded on average at 86. The fund began to invest on 1 June 2008 and has invested in 4 companies to date.879 86. The interest analysed involves a commitment of €2 million. 3. A limited partnership interest is valued by applying the two methods in order to contrast the results and to determine the optimum method of valuing secondary assets. Secondary market specialists use databases which contain the latest transactions with basic characteristics listed in order to follow the valuations of each fund type in the market. It is 30% funded so the interest comes with a large unfunded commitment.4% of their NAV. In this case the most up-to-date available valuations of high quality LBO funds in the secondary market will be applied.879. Upon applying this discount to the last published NAV. Table 9: Top-down valuation of a limited partnership interest Market value of the interest Total fund amount (nominal value) Commitment of the interest (5%) at nominal value Last published NAV Current market pricing Value of the fund in the market Market value of the interest (5%) Source: Author’s own € 000 40.III. we do not have enough updated data to be able to include the funding ratio in this analysis of the valuation. The funding ratio may have a negative effect on market value and therefore the value of the fund interest from this analysis may be higher than that existing in the market. The GPs are of high quality given their track record is in the top IRR quartile of LBO funds. at the end of the first half of 2010. Valuation in the Private Equity secondary market . the value of the present interest will be €469.973.1. To find the market valuation it is necessary to find valuations of transactions of funds that have the same characteristics. According to Cogent Partners.399 470 . published on 31 December 2009 is €10.000 10.95 - Real world valuation: empirical contrast of the two methods 3.4% 9. However.
this method will not be used to value the interest. the value would be slightly inferior to the one achieved with the comparable transaction method. due to the flexibility of the developed model. Private and confidential. 3. funded commitment.III. 3.2.2. cost structure. needs much more information than the top-down method. However.96 - Due to the limitations of the valuation as a result of using the trading activity of listed Private Equity funds. Bottom-up method: valuation using the model149 This method. the quality of the manager and the different scenarios (upside. the valuation of a limited partnership interest is very straightforward150.1 Introduce the fund’s financial data and growth estimates The fund’s last report is used to gather the financial data necessary to project and value the portfolio companies.com 150 It is only necessary to introduce the data into the grey cells in the hypothesis tab and then sensitise the sale price of the interest in the tab “command table” in order to stress the returns to the sale price. However. total amount. last published NAV and other required details. the current valuation of listed funds being 66. downside). Talking to the GPs can be a huge advantage in that it allows having more accurate information on future investment plans and the state of the portfolio companies and their growth outlook. It is first necessary to know the basic characteristics of the fund: date of creation.4% of the NAV (as of 19 July 2010). commitment of the interest. Valuation in the Private Equity secondary market . This information can be found in the LPA and in the last fund report. 149 .vantichelen@gmail. which requires the use of the valuation model developed with different market experts. These data are introduced into the valuation model. base. this valuation model is available upon request to Arnaud van Tichelen: a.
break-up fees. In this part we only present the analysis and the valuation of Company A.3% of unfunded 33. investment banking fees.00% 1.0.000 10.0% Investment period Capital already commited Remaining investment years Year 1 2 3 Investment holding period (Years) Years to liquidation Annual partnership Expenses Annual assumed director's fees. We have assumed that only maintenance investments (CAPEX) will be made in the portfolio companies and that it will equal depreciation for each year.97 - Table 10: Main characteristics of the fund KEY ASSUMPTIONS Creation date of the fund Next Year end of the fund Management fees during commitment period Management fees post commitment period GP Carried interest Prefered return hurdle GP Carry catch up (€000) 01/06/2008 31/05/2010 2.000 3 33.0% 28. the financial data of the portfolio companies and their growth assumptions must be introduced following 3 different scenarios (downside. or other similar fees Fee income offset Charge on management fee Charge on capital already commited Last Euribor (1y) 12.0 500. . Valuation in the Private Equity secondary market .333 Total fund size (committed capital at nominal value) % of committed capital expected to be called for investments Investor commitment (nominal value) 5% Invested capital Other Capital calls to pay expenses Total called capital Funding ratio Unfunded commitment 40.3% of unfunded 33. however it has been done for the four portfolio companies of the fund.III.5 according to the scenario (upside/downside). For all the companies.587 12.413 1. The valuation multiple (“exit multiple” in the table) used in the different scenarios is the one paid by the fund to invest in the company +/. The data has been projected using growth assumptions based on the managers’ expectations and on the growth rates of the sector of each company (table 11).0 9. advisory fees.0% 8.000 30. base. upside).333 9. For the present analysis.30% Source: Author’s own After entering the main characteristics of the fund (table 10).000 80. transaction fees.3% of unfunded 4 7 150. three growth scenarios were developed to be able to sensitise the valuation to different cases. we have used the financial data published in the last fund’s report of the four portfolio companies. monitoring fees.000 100% 2.333 9.50% 20.0% 100.0% 4.0% 1.0% 5.
638.5 100% 789.5 9.0% 2.848 -11.5 25.6 100% 815.2 100% 805.7% (24.5% 24.5% 28.5% 25.0% -2.6% 245 2.0% 5.0% 2.0% 0.5% 27.358 3.316.0 28.5% 26.2% 224 2.9 28.0% -10.3% 35.0% 3. Valuation in the Private Equity secondary market Table 11: Financial data and growth hypotheses of a portfolio company COMPANY A Transaction details Acquisition date Next Year end Fund's Share (%) Total Investment Last NAV reported Total net debt (last released) 30/10/2008 30/10/2010 60.314 8.3 100% 835.078.1 100% 782.4) - Source: Author’s own .0% 2.078.4 10.120.0% 2.61 5.1 100% 790.5 9.2% 27.3 - 30/10/2016 9.7 25.7 9.085 3.5 25.0% 0.2% 0% 876.5 28.0% 231 2.0% 3.2% 224.000 3.6 28.1 9.5% 25.3% 28.0% Key financial inputs Sales % growth Upside Base Downside EBITDA Margin % margin Upside Base Downside Depreciation/Amortization (implied) Exceptionnal Items EBIT Margin % margin Upside Base Downside CAPEX Capex as a % of depreciation Net Working Capital Working capital (as a % of sales) Change in working capital Pension funds and liablities 30/10/2008 10.0% 5.0% -6.61 Other assumptions Spread debt Implied Cost of debt Tax rate 4.8% (60.5% 25.2 25.9% 224.7 - 2.6% 220 2.197 31.5 - 30/10/2017 9.5% 252.0% NA NA NA NA NA NA NA NA NA 30/10/2009 8.0% 3.0% 2.2 25.8% 231.2% 29.5) - 30/10/2012 8.4% 28.6% 28.5% 24.0% -2.564 2.1% NA NA NA 0% 1.0% 25.2% 27.344.0% -6.230 25.0% -8.1% 28.0% 0.0% -2.9% 239 2.0% 3.2% 15.8 9.7 25.317 -6.001.9) - 30/10/2011 8.2% 28.2% 30.014 NA NA NA 3.III.0% 5.0% 4.0% 28.468 27.2% 27.3% 15.2% 28.2 100% 820.2% 29.6% (8.7% 238.5% 24.1% 25.5% 24.3 2.151 0.0% 3.0 9.2% 27.0% 2.345.0% 5.0 9.6% 25.11 4.386.0 25.0% 2.5% 26.820 3.5% 25.6 28.9 28.4% 15.298.1% 220.1 25.7 100% 851.2% 30.0% 220.5% 28.2% 30.11 5.562.917 29.414.2% 27.2% 26.0% -6.9% (125.9% 25.4% 253 2.5% 7.5% 27.3% 25.0% 0.2% 29.0% 2.322 Exit multiple .0% 5.9% NA NA NA 280 2.5% 26.249.1 - 30/10/2015 8.8 9.0% -4.183.5% 24.487.0% 2.5% 26.121.151 -2.6 28.2% 26.2% 26.8% 25.8% 28.8% 238 2.7% 28.298.3 9.8% 225 2.4% 220 2.128 7.6% 30/10/2010 8.98 - (€000) Exit multiple Upside Base Downside 5.2% 25.6% 245.2) - 30/10/2013 30/10/2014 8.1% 15.4 28.5% 27.0% 3.
This analysis of the underlying companies allows us to project their value over the life of the fund according to different scenarios and to estimate the distributions they may generate.III. Finally the exit of the investment is projected according to the timing assumptions (table 10) of distributions151 and returns are calculated: table 13. By deducting the net debt. The enterprise value of the company is then calculated using an EV/EBITDA multiple. which is usually about four years 151 . In order to value the investment the ownership percentage of the fund is applied to the equity value of the company. First a profit and loss account is created and projected following the case being analysed (downside/base/upside) in order to be able to project and analyse the company’s cash flows: table 12.2 The analysis and the valuation of the portfolio companies After entering the company data into the hypothesis tab. Then repayment of debt is projected using the operational cash flow to repay outstanding debt. we can value the equity of the company over the life of the fund. each portfolio company is valued.2.99 - 3. Valuation in the Private Equity secondary market . Depends on the investment holding period (“Investment holding period” in the model). the portfolio companies are valued by using a leveraged buyout valuation model. In this case.
0% 2.317 811 1.2% 220 2.085 3.100 - Table 12: Analysis and projection of the operating data of a portfolio company (base case) COMPANY A Scenario Next year end (Accounting) Exit Year Date Year>>>>> Profit & Loss (€000) Sales % Growth EBITDA % margin Depreciation/Amortization Exceptional EBIT % margin Interests PBT Taxes Net Income 10.564 3.3 1.Exceptional = Cash flow for debt repayment 1.151 -2.733 607 1.2% 231 2.317 25.3) 1.562 28.079 25.3) (224.240.3) (238.187.2 (15.2 1.404.7 220.126.0% 2.0% 2.2% 238 2.120 25.8 224.8 220.0% 2.197 31.140 8.5 (7.0 1.179.2 (15.7 (15.III.4 1.5% 388 1.7) 1.230 25.487 28.3 (15.314 2.386 835 1.3 Source: Author’s own .014 3.820 3.490.0 252.1% 8.346 28.5% 325 1.5% 263 1.299 28.2% 225 2.188.2% 224 2.0% 2.248 8.317 -6.247.2% 245 2.5% 2.5) 1.4 224.5 (220.6 60.506 9.551 Base 30/10/2010 30/10/2012 30/10/2008 30/10/2009 30/10/2010 1 30/10/2011 2 30/10/2012 3 30/10/2013 4 30/10/2014 5 30/10/2015 6 30/10/2016 7 30/10/2017 8 Cash Flows (€000) Net Income + Depreciation/Amortization .151 0.639 28.0% 2.386 25. Valuation in the Private Equity secondary market .184 764 1.9 (224.331.1) (231.7) (252.5) (245.2% 253 2.1 8.535.121 25.2% 220 2.551.415 28.126 8.164.2) 1.9 245.848 -11.2 1.2 (220.420 9.0% 2.249 25.8 231.1) 1.753 614 1.7 1.5% 135 2.9% 280 2.184 25.180 8.345 28.419.299 28.1 24.049 717 1.332 8.2% 8.2) 1.CAPEX .139.920 672 1.8 238.917 29.6) 1.815 635 1.4 1.5% 65 2.5% 200 1.079 25.1) 1.6% 2.358 3.Change in Working Capital .0% 2.468 27.505.5% 2.316.9% 239 2.
4 5.3 1.0 4.746.485 Investment Returns (€000) Fund's Share (%) Investment date Initial investment Market value Cash Flows Expected IRR Return multiple 30/10/2008 60% 30/10/2012 3000 3.855 - 8.6 13.3% 1.240 2.188 3.317 1.9 2.091.980.6 5.3 5.290 30/10/2010 2.092 30/10/2017 2.414.971 1.11 12.9 6.971 325 .11 13.711 30/10/2016 2.542 1.344.0 5.638.9 7.5 5.851 30/10/2011 2.8 13.322.226 65 30/10/2016 - 30/10/2017 - Investment value (€000) EBITDA Exit multiple Enterprise Value Net debt Pensions funds and other liabilities Equity Value 30/10/2008 30/10/2009 2.985.562.164 4.5 12.542 200 30/10/2014 2.174 - 3.9 5.669 - 7.783 1.135 1.322 30/10/2010 7.7 6.484.782.11 11.6 30/10/2009 30/10/2010 30/10/2011 30/10/2012 30/10/2013 30/10/2014 30/10/2015 30/10/2016 30/10/2017 3.11 11.783 263 30/10/2013 3.438 30/10/2014 2.0 3.510 - 4.187 6.778 4.963 30/10/2013 2.778 5.III.225.340.135 388 30/10/2011 6.6 5.710.542.2 5.000 12.11 13.0 5.612.970.626 - 7.487.746.11 11.226 135 30/10/2015 1.11 12.9 5.11 11.322 1.11 12.135.468.226 1.663 - 6.101 - 30/10/2012 4.345.298.6 5.091 - Source: Author’s own .8 11. Valuation in the Private Equity secondary market Table 13: Projection of the debt repayment and valuation of the investment Debt repayment and interests (€000) Opening net debt -Cash flow for debt repayment =Closing debt Interests 30/10/2008 30/10/2009 Opening 7.298.775 30/10/2012 2.7 7.5 9.065 - 4.114 30/10/2015 2.
2. In the opposite case. the net cash flow available for LPs is calculated. the different cash flows from the investments and distributions are added together. the cash flow of the acquisition of the limited partnership interest is subtracted153 from the net cash flow available for LPs: table 18. but so too is the projection of the unfunded part of the fund: table 14. Here 5% 153 152 . See 2. Finally.5. The waterfall The cash flow of the acquisition of the limited partnership interest comes from the tab “Command table”.3 Adding of the cash flows in the waterfall of the fund After having valued the underlying companies. it is necessary to add all the cash flows from the capital calls and distributions in the waterfall of the fund. carried interest): table 16. The distributions then pass through the waterfall as previously explained152 (hurdle. The different costs of the fund are then calculated. in order to calculate the gross return of the secondary investment.III.102 - 3. the cash flows available for distributions are calculated: table 15. they will have to be funded by the LPs. Valuation in the Private Equity secondary market . iii. If there are not enough distributions to cover these costs. It is calculated as if seeking to value the total fund given that it is later multiplied by the percentage of the interest that we wish to value. First. catch up. After these intermediate steps. The cash flows of the underlying investments are added together with the costs and distribution structure of the fund in order to calculate the total cash flows of the fund.2. The capital calls are subtracted from the distributions that the limited partners receive (table 17) and the net cash flow is calculated in each year of the life of the fund.
0) (800.150 14.108 14.0 15.778 4.333 15.258 5.977 15.0) (800.000 3.0 3.0) 400.867 (150.939 3.867 - - - - Source: Author’s own Table 15: Calculation of the costs of the fund Fund income & costs Distributions from investments Annual partnership expenses Annual management fee Management fee offset (related to portfolio company's fees) Cash available for distribution to LPs (150.867 15.333 - 9.0) (0.867 15.108 4.103 - Table 14: Cash flows from the fund’s investments Date Year>>>>> 31/05/2010 0 31/05/2011 1 31/05/2012 2 31/05/2013 3 31/05/2014 4 31/05/2015 5 31/05/2016 6 31/05/2017 7 - Cash flows to fund from underlying investments (Year end) Invested capital 10.939 (150.0 (550.867 15.0) 14.867 - 9.769 15.0) (800.0) 400.0) 400.0) 400.867 - 0 15.0) 400.0 13.0) (150.072 - 28.333 30.867 15.867 15.0) (140.108 (150.867 15. Valuation in the Private Equity secondary market .867 (150.III.939 3.0) (420.558 3.333 - 9.0 (550.0) 400.939 - 18.667 15.867 (150.837 15.0 15.0) 400.413 Capital under management after investment period Distributions Invested capital COMPANY A COMPANY B COMPANY C COMPANY D Unfunded part Year 1 Year 2 Year 3 Year 4 9.0 16.0) (280.117 - Source: Author’s own .
7) - 31/05/2016 (150.557.0) - 31/05/2017 (150.8) - .977 (7.837 (15.6) - - - Source: Author’s own Table 17: Net cash flows available for LPs Total LPs Cashflows Investment (capital drawn and expenses) (12.549.147.0) 260.285 - Source: Author’s own .566.000) (9.883 9.9) 0.883) (9.768.769 (3.333 9.9) (6.4) 8.7 8.333 (150.9 (3.0) 31/05/2012 9.333 (150.867 15.0) (400.936.0) (400.0) (20.768.883 9.0 (0.8 4.5 (1.769 15.039.867 16.939 3.108 13.0 15.557.883) (9.7) (8.883) (9.0) 14.000 10.III.883) (9.549.039.867 15.0) 31/05/2013 9.333 (150.0) 120.558 (13.8 3.936.7 15.7) 11. Valuation in the Private Equity secondary market Table 16: Waterfall of the fund Fund Cash Flows Capital drawn to fund investment & Expenses Purchase of investments Annual Partnership Expenses Annual Management Fee Distributions from Investments Cash available for LP distributions Repayment of Invested capital Repayment of Preferred return to LPs Cash available Post Preferred Return to LPs GP Catch Up Cash available post Preferred Return and GP Catch Up to LPs Carried Interest to GP Distribution to LPs 31/05/2010 12.0) 3.977 4.000) Capital repaid in period (Capital drawn and expenses) Repayment of Preferred Return Distribution to LPs Total LPs Flows (12.419.0 15.9 15.333) 13.837 7.735.0) 400.735.413 31/05/2011 9.836.104 - 31/05/2014 (150.683.224 3.117 (4.6 11.8) - 31/05/2015 (150.0 15.836.0) (400.7 6.
883) (9.883) (9.769 3. Valuation in the Private Equity secondary market .769 - 15.883) 4.977 15.224 - 3.285 11.000 (4.04% (4.224 4.977 - 11.105 - Table 18: Determination of the returns of the secondary investor according to the acquisition price Date Returns at targeted price Price paid Total secondary investor flow Implied IRR Capital returns Capital paid Total return of the operation 31/05/2010 31/05/2011 31/05/2012 31/05/2013 31/05/2014 31/05/2015 31/05/2016 31/05/2017 - 4.883) (9.837 - 15.000) 2.837 15.III.000) 20.15 (9.285 - - - - Source: Author’s own .
Valuation in the Private Equity secondary market . The model also analyses the sensitivity of the investment returns to the different key variables used in this valuation (growth scenario.2.2 Source: Author’s own In this case. info available) Multiple of return (x) for unfunded Base 2 Investment holding period (Years) Multiple 4 Good 1 1.000 200 20. quality of the manager. Table 19: Determination of the price to be paid according to scenarios and returns Target returns Price willing to pay (for 100% fund) Implied price for LP interest Implied IRR Implied Multiple Returns % of reported NAV % Discount to NAV 4. Depending on the price used and the different scenarios chosen (of growth of the portfolio companies and of quality of the manager). .8% of its last NAV.8% 63.000.III. According to present growth assumptions and the timing of capital calls and distributions applied.7 1.4 Determination and sensitisation of the price of the limited partnership interest according to different scenarios The price payable for the entire fund that we wish to value is then entered. This values the analysed interest (5%) at €200.8 YES Command Scenario (Growth assumptions & Exit multiple) Unfunded Quality of the GP (trackrecord.04% 2. the gross return on the secondary investment will be determined.7 Good Base Bad 1.106 - 3. The value of the interest is determined by multiplying the price to be paid for the whole fund by the percentage of the interest being valued. and timing of the investment).4 1.000 and represents 36.000. a base scenario (of growth and valuation of the portfolio companies) and a highquality management team have been chosen. the valuation of the fund that allows achieving an IRR of 20% with a multiple higher than 1.2% (€000) Does investment at this price reache target? Target IRR 20.8 times (typical minimum gross returns that secondary investors seek) is €4.0% YES Target Multiple return 1.15 36.
Valuation in the Private Equity secondary market .7% 14.0% 15.III.1% Investment holding period (Years) 3 4 5 6 0.1% 20.17 1.4% 14.300 22.6% 20.700 28.7% 4.2% 16.2% 4.300 27.3% 14.5% 14.2% 20.7% 16.5% 16.9% 14.0% 16.4% 19.9% 3.9% 15.6% 4.8% 14.18 1.20 1 2 3 3.100 19.200 19.20 3 4 5 6 3.9% 20.27 2.3% 4.12 1.6% 4.000 28.7% 15.200 22.300 19.0% 20.16 1.24 2.2% 14.7% 3.700 20.6% 4.6% 15.91 4.2% 14.5% 17.4% 20.2% Scenario (Returns) Upside Base Downside 2.9% 16.6% 19.0% 14.15 1.100 27.3% 4.2% 16.9% 16.1% 14.800 28.6% 16.4% 20.900 23.000 22.5% 16.7% 19.90 Quality of the GP Good Base Bad 0.0% 3.4% 16.23 2.700 2.20 1 2 3 3.3% Source: Author’s own .5% 4.26 2.200 2.100 2.7% 3.8% 3.4% 19.15 1 2 3 3.9% 20.700 23.107 - Table 20: Sensitivity of the returns to the different key variables Sensitivity to Price and other assumptions Scenario (IRR) Upside Base Downside 0.29 2.7% 16.300 2.4% 16.8% 14.92 4.4% 4.5% 4.200 27.28 2.14 1.5% 14.94 3.900 28.800 23.25 2.800 20.4% 4.93 4.900 20.8% 3.000 20.94 3.6% 16.13 1.2% 15.900 2.000 2.91 4.9% 19.5% 19.4% 14.4% 15.7% 14.0% 16.800 2.4% 4.100 22.
the top-down method does not 154 “Valuation [of the NAV] remains part science. each asset is different given that it has different underlying assets. Some leave the assets at their investment price. Table 21: Contrast of the valuation according to the different methods Method Top-down Bottom-up Value of the interest (5%) 469.8% Source: Author’s own In view of these results.108 - 3. Comparison of the results: explanation of the difference 3.3. But.4% of its NAV. although there are portfolio valuation guidelines.1 Comparison of the results By applying the two valuation methods to the same limited partnership interest we find very different results. and some at the price of the latest share issuance. part art”: Triago. 3.8% of its NAV.3. different cost structures. Valuation in the Private Equity secondary market . It is therefore very advisable. the concept of NAV is very subjective and cannot be used as the base for the valuation as in the top-down method. Despite trying to compare similar assets.4% 36. although the bottom-up valuation method using the valuation model values it at 36. 2009 . The market valuation method (top-down) values the interest at 86. why is there such a difference between the two methods and which is more trustworthy? 3.2 The concept of NAV is subjective The top-down method is based on the valuation of the manager. and different allocations of the distributions.III.973 200. For these reasons. «The secondary seller’s options». GPs value their portfolio in very different ways.3. However. when possible. Indeed.000 % of the NAV 86.3 Each asset is different One of the key considerations when choosing a valuation method is the uniqueness of each asset. it seems clear that valuation method is very important when buying (or selling) in the secondary market. other at their market value. The valuation of their portfolios is also very subjective154 given that the manager himself may make very optimistic/pessimistic estimates of the growth of portfolio companies. for a buyer to make his own valuation of the investments in the portfolio using the bottom-up method.3. management teams of differing quality.
«Pricing private equity secondary transactions» 22 July 2002. The only method capable of valuing the intrinsic value of the assets is the bottom-up method that takes into account all the characteristics of the fund and its underlying assets. The following table clearly demonstrates that the assets’ value cannot be generalised given that for a single type of asset there are significant variations in the valuation according to the asset being exchanged. Cogent Partners. summer 2009». The gain or decline in that basket from the day of the last valuation can provide an indication of how the NAV may have changed155.AltAssets. Table 22: Discrepancy in the valuation of the assets (H1 2009) % of bids on funds All LBOs Venture Other Bids ≤0% of the NAV Bids <20% of the NAV Bids >60% of the NAV 7% 17% 13% 8% 20% 12% 4% 17% 13% 5% 5% 21% Source: Author’s own using data from Cogent Partners. The concept of NAV is very static given that it gives the value of the asset at the end of each quarter. because the top-down method does not take into account the change in value between the valuation and the publication of the last NAV. In a bear market valuations fall over time so that is very probable the next NAV will be lower than the last published.3. 3. However. it does not constitute a robust method to value assets in the secondary market. 2009. «Secondary Pricing analysis interim update. there may exist a difference between the last published NAV and the assets’ current market value due to the time that passes between the publication of the NAV and the valuation of the asset.com (last accessed: 26 January 2010) 155 . Although it is not very accurate as a rough proxy to market value. the performance of a basket of public market comparables can be considered. However.III. www. Since GPs usually take between 1 and 4 months to publish the NAV of their assets the last NAV available may be up to four months old.109 - take into account the singularity of each asset and therefore does not constitute an accurate valuation method.4 The lag of the NAV The top-down method applies the valuations of the market to the last published NAV. Valuation in the Private Equity secondary market .
2010 – Secondary funds raised in 2009: Preqin.III. 2010 . According to a study by Probitas Partners in February 2010.4 10 0 Dry powder at the beginning of 2009 Secondary transaction volume in 2009 2009 secondary fundraising Dry powder at the beginning of 2010 Source: Author’s own. it is interesting to compare this same $75 billion of offerings with the dry powder that is expected in 2011. Compared to the offerings of some $75 billion. Valuation in the Private Equity secondary market . or dry powder. This is calculated in Figure 46 below. 156 Probitas Partners. The imbalance of capital available to purchase funds in the secondary market minus the transaction volume closed during the year is the capital overhang. «Private Equity Spotlight January 2010».3.8 billion. in view of the forecasts for 2010. Figure 46: Dry powder in the secondary market in 2010 ($ billions) 60 50 40 18. «Adams Street Secondary Networking Event». There is therefore an imbalance of some $25 billion that provides a clear advantage to the buyers. «Adams Street Secondary Networking Event».5 A buyers’ market In the secondary market there currently exists an imbalance between large supply and limited demand that negatively impacts valuations.8 20 41. the dry powder of the secondary funds in 2010 is about $50. data: Dry powder and secondary transactions 2009: UBS Private Funds Group.5 (9. However.110 - 3. it was estimated that about $75 billion of assets were being offered on the secondary market156. creating a buyers’ market. 2010.1) 30 50.
Valuation in the Private Equity secondary market . If we assume that the transaction volume will be about $20 billion (forecast with the model assuming the base scenario) and that secondary funds raise about $27 billion in 2010 (estimate by Campbell Lutyens157 and Probitas Partners158).8 billion. data: Dry powder and secondary transactions 2010: Author’s own estimates – Secondary funds raised in 2010: Probitas Partners. 157 158 See appendix 7.8 50. A buyers’ market may change even more rapidly if transaction volume in 2010 is lower than forecast. However.2 billion imbalance in the market. valuations are distorted from the real value of the assets and therefore cannot be used to provide an accurate value of an asset in the secondary market: the inefficiency of the top-down method is once more demonstrated.III. «Adams Street Secondary Networking Event».111 - Figure 47: Estimate of the dry powder in the secondary market in 2011 ($ billions) 60 50 27 40 (20) 30 57.13 which summarises the call to Campbell Lutyens (10 March 2010) . 2010 159 See appendix 7.13 which summarises the call to Campbell Lutyens (10 March 2010) Probitas Partners.8 20 10 0 Dry powder at the beggining of 2010 2010 Estimated transaction volume 2010 Estimated secondary fundraising Dry powder at the beginning of 2011 Source: Author’s own. Therefore it is clear that the imbalance in the market will slowly be reduced. This represents a $17. 2010. due to the imbalance in the secondary market. The reduction of this imbalance will gradually end the buyers’ advantage in the market159. «Adams Street Secondary Networking Event». it is forecast that dry powder at the beginning of 2011 will be about $57.
the top-down method should be used. Indeed.112 - 3. Furthermore the bottom-up method minimizes the valuation distortion attributable to the imbalance between buyers and sellers in the market and NAV lag.6 Key valuation method: bottom-up These explanations of the difference in valuations of a limited partnership interest when using the two methods clearly demonstrate that the bottom-up method is the most appropriate method to ascertain the value of assets on the secondary market.3. Valuation in the Private Equity secondary market . . However when there is not enough information available to make a bottom-up valuation. it is the only method that allows us to take into account the uniqueness of the assets and the growth perspectives of each underlying company.III.
PART IV: CONCLUSIONS .
For all of the reasons mentioned above. «Guide to secondary market intermediaries». PEIbooks. In view of the capital raised in 2009. the secondary market is the only segment that grew in comparison with 2008. it is in the best interest of general partners to facilitate transactions in their funds and allow limited partners to turnover within their fund161. «Heightened Managers Concerns for Secondary Transfers». Kenneth I.2. Rebecca. Fried Frank PEP Talk. CONCLUSIONS 1. «The Private Equity Secondaries market: a complete guide to its structure transaction and performance». By reducing the liquidity risk inherent in the Private Equity asset class. price discovery. Analysis of the theoretical characteristics of Private Equity. its history and of current conditions highlights the growing importance of the secondary market and its crucial role in the development and maturity of the Private Equity industry. Therefore it not only benefited the industry by attracting more capital by reducing the liquidity risk but also by raising further capital in this growing market segment. «Adams Street Secondary Networking Event». Conclusions Analysis of the secondary market: an opportunity for the Private Equity industry 1. Moreover. 2010 160 . It allows investors to find liquidity without needing to sell the underlying assets. 2009 163 UBS Private Funds Group. this market provides value indication. 1. and facilitates future fundraising160. It supports the investments and prevents LPs from defaulting thereby building a strong investor base for future funds. and Neuschatz Zelenka. 2008 161 Ansbacher.1 billion in 2009163) has been disappointing due to Campbell Lutyens.114 - IV.IV. The existence of a secondary market has a beneficial effect on primary assets. Conclusions . the transaction volume ($9. investment in Private Equity is made much more attractive transforming the secondary market into a driver of growth in the primary market. The future: growth and sophistication A constantly growing market Although 69% of investors hoped that 2009 would be a record year in the secondary market162. 2010 162 Dow Jones.1. This liquidity in the market has many advantages both for LPs and GPs. and Rosh. Richard I.
Any change that increases regulatory pressure on financial institutions’ investments will have a direct effect on the sale of their Private Equity assets in the secondary market and the spin-out of several captive Private Equity managers. FAS 157. the need to liquidate “pay to play” funds combined with an increase in secondary valuations will promote activity in the market. lack of visibility). the cost of financing Private Equity assets. Monitor regulatory changes In 2010.5 billion per annum during the next five years (2010-2014) which represents a compound average growth rate (CAGR) of between 13% and 18. regulatory changes will be a key element that will have to be monitored. In the US the famous “Volcker Rule” limits banks’ proprietary investments and will have a major impact on Private Equity activity. large bid/offer spread. 2010 . This market sophistication is reflected in the growing importance in the use of an adviser experienced in secondary transactions. Regulated financial institutions will be the main sellers in 2010 due to the need to repay public funds and restructure their balance sheet. However. In the medium term it is forecast that there will be more spin-outs164 of captive Private Equity managers of financial institutions. it is projected that the market may have an average volume of between $17.115 - market circumstances (low valuations. According to the results of the application of the present statistical correlation model. Although there is a transition period to comply with this rule many financial institutions are considering selling their Private Equity investment divisions and holdings.5 and $22.IV. Conclusions . it seems that 2010 will be the record year that participants in the market have longed for to prove that it is not a current trend. 2010 Probitas Partners. «Adams Street Secondary Networking Event». But there will also be more direct sales of interests in companies165 as current market conditions necessitates their use to generate valuable liquidity for managers.8%. Moreover. nor an ephemeral market. 164 165 Probitas Partners. «Adams Street Secondary Networking Event». An increasingly sophisticated market The market is becoming increasingly sophisticated and innovative sales structures are used to better realize all parties’ objectives.
allows the investor to produce an informed valuation and gives him a clear advantage. Volume VI Nº4». valuations are expected to halt their increase in the medium term due to the supply/demand imbalance that acts as a natural ceiling167. 2010 167 Probitas Partners. 2010 169 Probitas Partners . experience and necessary information. «Opportunities and challenges in Secondaries». Cogent Partners.116 - 1. See appendix 7. «Adams Street Secondary Networking Event».IV. 16. the bottom-up method is the most appropriate method to ascertain the intrinsic value of the assets. However.4% of investors fear there is too much dry powder in the secondary market and that it will have a negative impact on returns169. SecondMarket). Indeed. Valuation in the secondary market: trend and method Market valuations: a controlled rebound? After having fallen to 36% of the NAV in the first half of 2009 the market has rebounded. «Secondary pricing trends and analysis. 2010 168 Deal Flow Media. which summarises the call to Campbell Lutyens (10 March 2010). Goldman Sachs in The Journal of Alternative Investment. Although we are currently in a buyers’ market due to the supply/demand imbalance its evolution must be tracked closely. If he has the resources. For this reason successful secondary managers usually have primary capacities that allow them to have relationships with GPs and get access to the necessary information.13. 2003 166 . «The Distressed Debt Report. During the first half of 2010. July 2010». he may have more confidence in his valuation and be more aggressive in his bid because he has a greater chance of achieving his returns170. «Private Equity Market Review and Institutional Investor Survey». Valuation method for secondary assets: the supremacy of the bottom-up valuation method When valuing LPs’ interests in the secondary market. Conclusions .3. pricing for limited partnership interests in the secondary market increased steadily to 80%166 of NAV anticipating an increase in the valuations of LP interests. However. 74-86. the top-down method is a good method to approximate valuations and the mood of the market in the absence of information required for the bottom-up method. which is based on analysis and valuation of the underlying assets. According to a survey by Probitas Partners published in November 2009. 2009 170 Clark. This method. this imbalance may be reduced due to volumes being raised in secondary funds and the large amount of dry powder accumulated by secondary buyers (“There are a lot of secondary buyers that have a lot to deploy”168 Jeffrey Bollerman. In this context access to information becomes a significant challenge in order to be able to make a bottom-up valuation and highlights the importance of having strong relationships with GPs. Geoffrey and Christopher Kojima.
117 - 2. private placements. Future research Being an initial analysis of this segment of Private Equity. some suggestions for future research are in order. etc. Conclusions .IV. . This dissertation has discussed throughout the Private Equity secondary market but it would also be useful to study other secondary markets such as those of hedge funds or assets invested in debt (syndicated loans. There have been many concerns raised with respect to GP compensation and it would be interesting to analyse the debate in the context of future fundraising. In studying the Private Equity industry the funds’ cost structures were examined and this brought up the tensions currently experienced between GPs and LPs the most significant being fees.).
The manager typically receives 100% of the distributions up to a shareout of the distributions defined by the carried interest (20/80). In Private Equity the unfunded commitment is a blind pool given that the managers’ exact future investments are unknown. . Deal flow: flow of transactions. Capital calls: request from fund managers to draw down a part of the committed capital to fund an acquisition or funds’ costs. Cash drag: negative effect caused by cash balances (or money invested in treasury assets) on the overall return of a portfolio.Glossary . Collateralized Fund Obligation (CFO): debt securitization of Private Equity fund or hedge fund assets. Applied to asset valuation. it consists of analysing the underlying assets in order to then value the fund. Bottom-up: information-processing strategy that begins by analysing the individual parts in order to then analyse larger components.118 - GLOSSARY Blind pool: investment commitments with no stated investment target. Credit crunch: squeeze in the availability of credit that causes the economy to contract. In Private Equity funds the "carried" is usually about 20% of the capital gains obtained by the fund. Covenants: agreements between a company and its creditors that indicate the financial conditions that the debtor must observe. Catch up = Total hurdle × Clawback provision: clause in the LPA by which the GP can require the LPs to return some distributions in special circumstances. Catch up: part of the carried interest that the manager receives once the principal and a hurdle rate has been paid to LPs. Carried interest (“Carried”): the share of profits of the fund managers in the capital gains resulting from the operations carried out by the fund.
exceeding the allocation targets of the portfolio which then requires re-balancing. taxes. is the minimum amount of return sought by the investor. Family office: a company that offers advisory services to family assets. Funding ratio: ratio of capital funded by investors to the total commitment of investors in the fund. Endowment: institution’s investments that seek to cover a part or all the needs of the institution to which it belongs with its investment returns. the investment activity is halted. Asset minus liabilities. EBITDA: earnings before interest. General Partners (GPs): Private Equity fund managers. Internal Revenue Service (IRS): tax authority in USA. This policy is intended to prevent money laundering and terrorist financing.119 - Denominator effect: in a portfolio when the value of one asset class falls. Due diligence: process of auditing financial.Glossary . . Before this return is earned by the LP. legal and tax aspects of a transaction. the percentage allocation to other assets rises mechanically in the portfolio. Distressed: an asset or an investor that lacks liquidity to finance short-term commitments. It is usually an Internal Rate of Return (IRR) of 8%. Fair value: amount or value for which an asset may be exchanged between interested and fully-informed parties. EBIT: earnings before interests and taxes. the fund manager can not receive any share in the capital gains. Operating profit. Equity: part of the company that belongs to the shareholders once they have paid their financial obligations. Fundraising: activity that consists of raising funds in the market. Dry powder: capital reserves available to invest. Key man clause: clause within an agreement that indicates if one or more specific key named managers stops dedicating a required level of time to the management of a fund. Hurdle rate: also called preferred return. Follow-on: is said of an investment when it backs an existing investment. Know Your Customer (KYC): due diligence requirement that financial institutions must perform to identify their client and ascertain relevant information in order to transact financial business with them. depreciation and amortisation.
Pay-to-play funds: funds which the banks had invested as a way to get business with the Private Equity funds (advisory mandate. Limited Partners (LPs): institutions or individuals that contribute capital to a Private Equity fund. In the secondary market it is a sale structure in which the buyer acquires an entire portfolio of captive assets. leverage) but that have never been a strategic asset. etc. selling the asset). When one is more senior it means that it is less subordinated. Over-commitment: allocation of resources to an asset class in excess of the capacity.). Side letter: separate agreement that is used to clarify or modify the terms of a previous agreement. Special Purpose Vehicle (SPV): legal entity created to fulfil a temporary and specific objective. and on which the other party may rely. Right of First Refusal (ROFR): right that gives its holder the option to enter a transaction with the owner of an asset before the owner can enter into that transaction with a third party. Stapled secondary: sale structure in which the buyer acquires assets of a fund together with investment commitments in the next fund of the manager (GP). fees and expenses. It may be owned by one or more persons. In the case of Private Equity funds. Seniority: order of repayment in the event of bankruptcy. the lag refers to the delay between the publication of the NAV and the current asset valuation (between 1 and 4 months) that makes the valuation process more difficult. Representations and warranties: statements by which one party gives certain assurances to the other. Qualified Matching Service: approved management services for secondary transactions by the tax authorities. . Material Adverse Change (MAC): in a sale contract it is a legal provision that allows the acquirer to withdraw from the transaction if the target suffers a substantial change. Pre-emption right: right of first refusal. Spin-out: when a division of a company becomes an independent business. profit sharing.Glossary . this refers to the subordination level. Limited Partnership Agreement (LPA): formation agreement which sets out in detail legally binding relations between the LPs and GP (investment policy.120 - Lag: a delay caused in a communication. Lock-in performance: process that consists of realizing the existing return on an asset (by hedging. In the capital structure. The use of a QMS allows exchanging an additional 8% above the statutory 2% of a fund’s capital commitment in a single fiscal year.
Top-down: information-processing strategy that analyses the system as a whole without going into subsystem details. In the case of a fund manager. it consists of analysing market valuations and applying them to the asset being valued. It is defined in the LPA. A floating interest rate can be exchanged for the cash flows of an asset. Total Return Swap: derivative contract in which two parties swap the cash flows.121 - Straight sale: traditional sale structure of one or more interests in funds or companies.Glossary . Tail end: sale structure in which a fund sells its remaining assets. Unfunded: uncalled part of the committed capital. Waterfall: structure of how distributions are shared between the GPs and the LPs. Vintage year: the year in which the fund makes its first investment. it refers to the past returns of previously managed funds. Track record: past performance. Venture Capital (VC): Private Equity investment style that invests in the early stages of companies. Applied to asset valuation. Strip sale: sale structure in which only a part of one or more portfolio companies or interest in funds are sold. .
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............ 143 NEWSLETTER Nº1 ......164 Every appendix is available upon request to Arnaud van Tichelen: a............................................................................................................159 Call with Pantheon Ventures (09 December 2009) ........................ 1........131 - APPENDIX171 1...........................3 2....................................... 7.............................................135 Database of the private marketplaces ................................149 Call with Secondmarket (01 December 2009) ........... 147 SUMMARIES OF CALLS AND MEETINGS .......137 2....................................Appendix ..................................................................................................4 7...............157 Meeting with Altamar (07 December 2009) ................... 149 Call with UBS (26 November 2009) ....133 Database of the legal advisers ...........161 Call with Headway Capital (09 December 2009) ...........140 3.........6 7...............2 Database of the dedicated secondary buyers (only direct transactions) ........................8 171 REQUEST FOR SPONSORSHIP ....................... 2.....................1 DATABASE OF THE ADVISERS IN THE PRIVATE EQUITY SECONDARY MARKET133 Database of the financial advisers ..........................139 2...............com .........................151 Call with Breslin AG (02 December 2009)..................................................... 144 SPONSORS OF THE STUDY AND INTERVIEWS............. 146 MEETING GUIDELINES........................vantichelen@gmail...............2 1.......................... 6..............3 Database of firms investing part of their funds in the secondary market.................. 5.....................................................................7 7.................136 DATABASE OF THE BUYERS IN THE PRIVATE EQUITY SECONDARY MARKET137 Database of the dedicated secondary buyers (LPs interest and direct) .................................1 1.......................... 7.........................................155 Call with Fidequity (03 December 2009) ...........................................153 Email from Preqin (02 December 2009) .......3 7..............................2 7..............5 7...................................................1 7.............................. 4..................................
.............................2 8... 10.............2 10..............13 7.......................1 8................187 STRUCTURE OF LISTED PRIVATE EQUITY FUNDS ...distressed)..........................9 7.......................................................................11 7........186 Venture capital funds ..........12 7...............180 Primary fundraising ..178 Secondary fundraising....................................................2 Call with Campbell Lutyens (10 December 2009)..................... 188 Structure of listed direct Private Equity fund ....1 11........... 11...3 11................1 10......................................................170 Call with HarbourVest Partners (09 March 2010) ...............Appendix ........132 - 7.......3 9...............14 8................................................188 Structure of listed indirect Private Equity fund (listed fund of funds) ........................ 178 Historical transaction volume in the secondary market .......................................................................... 182 HISTORICAL VALUATIONS IN THE PRIVATE EQUITY SECONDARY MARKET186 LBO funds ................................................181 SECONDARY MARKET PROJECTION MODEL ..168 Call with UBS (02 February 2010) .......165 Meeting with SJberwin (14 December 2009) ...........186 Other funds (real estate............10 7...................................................................................infrastructure............................... 8...................................174 Meeting with Arcano Capital (18 March 2010) ..189 ........................................................................... 10...................176 ANALYSIS OF PUBLISHED HISTORICAL DATA .............172 Call with Campbell Lutyens (10 March 2010)............................
Dunleavy Paul Delaney Position Managing Director CEO Managing Director Managing Director Partner Partner Partner Partner Managing Director Managing Partner Managing Partner CEO Principal Managing Director Managing Director Managing Principal Managing Partner Managing Director Managing Partner Director Partner Managing Director Managing Director Managing Director Mail email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org pdhemery@cartadiem. Crikelair Bernhard Engelien Roger Luscombe Mike Custar Francois Garcin Matthias Stanzel Patrick S.biz contact@axonia-partners.Appendix . Griffin Private Equity Group .com andrew.fr email@example.com bnelson@altitudecap. Kraftson John Edwards Matthew Longhurst Andrew Kellett Alexandre Alfonsi David Waxman Todd Boyd Tim Griggs David Karabelnik Thomas Liaudet Olav Koenig David Chamberlain Philippe d’Hémery Terence M.uk mike.com Company Almeida Capital Alpha Associates AG Altitude Capital Advisory Ariane Capital Partners Augusta & Co Autumn Capital Partners Axon Partners Axonia Partners Azla Advisors Boyd & Co Bluetower Capital Breslin AG Campbell Lutyens Capital Dynamics Capstone Partners Carta Diem Champlain advisors Cogent Partners Continental Capital Partners Credit Suisse Group Fidequity Global Finance Greenhill & Co.firstname.lastname@example.org@alpha-associates.com francois.com email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org pdunleavy@greenhill. Database of the advisers in the Private Equity secondary market email@example.com - 1.com peter.1 Database of the financial advisers Name Richard Sachar Peter Derendinger Brett A.firstname.lastname@example.org Liaudet@campbell-lutyens.com email@example.com firstname.lastname@example.org timgriggs@bluetowercapital. Nelson Donald W.com info@augustaco.
134 Name Paul Sanabria Pascal Isbell Edward Holdsworth Enrique Cuan James Lee Harald Maehrle Monica Vinje Markus Kroll Lawrence Thuet Paul Delaney Espen Robak Mark O'Hare Kelly DePonte Jim Soleymanlou David Morton Francois Roux Nick Hatch Francois Gamblin Simren Desai James Miller Mathieu Dréan Nicolas Lanel Position Managing Director Partner Partner Managing Partner Principal Managing Partner Managing Partner Partner Managing Principal Managing Director President Managing Director Parner Managing Partner Partner Managing Principal Vice President CEO Associate Managing Partner Managing Principal Executive Director Mail email@example.com firstname.lastname@example.org nicolas.com email@example.com thuet@parkhillgroup. Spin Out of the Merrill Private Placement team 2.com firstname.lastname@example.org@rouxcapital.com email@example.com@ matrixgroup. «Guide to Secondary Market Intermediarie.Dow Jones.firstname.lastname@example.org email@example.com mohare@preqin.».com firstname.lastname@example.org email@example.com firstname.lastname@example.org francois.com md@triago.Appendix Company Houlihan Lokey Lancea Partners Lazard Matrix Group Mercury Capital Advisors MHT Partners Secondary Advisors Mummert & Company Nakatomi Capital Palomar Corporate Finance Park Hill Group Patronus Capital plurisvaluation Preqin Probitas Partners Rainmakers Partners Richmond Park Partners Rothschild Roux Capital Scalar Partners Secondcap Setter Capital Somerset Capital The Camelot Group International Triago UBS Private funds Group 2 1 .com nick. 2009 – Companies websites .com email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org 1. Only Brokerage Source: Author’s own.com email@example.com francois@secondcap.
Schwartz John Daghlian Shukie Grossman Michael D. Gotshal & Manges Kirkland & Ellis Kaye Scholer Source: Author’s own Name Nigel van Zyl Rufus C.com thomas.com firstname.lastname@example.org djschwartz@debevoise.Appendix 1.2 Database of the legal advisers .com echerney@kayescholer. Ansbacher Hilary Prescott David J.com shukie.zyl@sjberwin. Cherney Position Partner Partner Partner Partner Partner Partner Partner Partner Partner Partner Mail nigel. Belsley Emanuel S. Beaudouin Richard I.com email@example.com@weil.135 - Company SJberwin Goodwin Procter Wilmer Cutler Pickering Hale and Dorr Fried Frank Covington & Burling Debevoise & Plimpton O'Melveny & Myers Weil.com .firstname.lastname@example.org richard. King Thomas A.email@example.com firstname.lastname@example.org@friedfrank.com michael.
com email@example.com - Company IlliquidX ICAP Alternative Investment Group NYPPEX SecondMarket Trusted Insight 2 PEFOX 1 Name Zachary Latif Laura Prager MaryAnn Sapione J.com 1.com jbollerman@secondmarket. Bollerman Kishore Kansal Position Partner Managing Director Vice President Director Managing Partner Mail firstname.lastname@example.org Database of the private marketplaces . Biggest marketplace for Limited partnerships 2.prager@us. Marketplace to negotiate derivatives on funds Source: Author’s own .com email@example.com kishore.com msapione@nyppex.Appendix 1.icap.
com firstname.lastname@example.org email@example.com 1.com firstname.lastname@example.org 2.137 - 2.com email@example.com firstname.lastname@example.org brian.000 10. Database of the buyers in the Private Equity secondary market 2.000 4.com john.com Comments Company Lexington Partners Goldman Sachs Private Equity Group HarbourVest Partners Coller Capital Credit Suisse Strategic Partners Landmark Partners Partners Group AlpInvest Partners AXA Private Equity Pantheon Ventures Paul Capital Partners Adams Street Partners Pomona Capital Neuberger Berman LGT Capital Partners Greenpark Capital AIG PineStar Capital Liquid Realty Partners Morgan Stanley Alternative Investment Partners SVG Advisers Fondinvest Capital JP Morgan Asset Management Arcis Group Hamilton Lane RREEF Private Equity Montauk Triguard VCFA Group Newbury Partners Only Real Estate Listed PE vehicle .com email@example.com@alpinvest.500 firstname.lastname@example.org ian.com chris.com email@example.com@landmarkpartners. Carr Richard Lichter Position Partner Managing Director Managing Director Principal Managing Director Principal Partner Investment Manager Managing Director Partner Partner Partner Principal Managing Director Principal Investment Director Managing Director Chief Investment Officer Managing Director Director CEO Portfolio Manager Managing Partner Principal Managing Director Principal Founder Managing Partner Mail firstname.lastname@example.org@rreef.800 2.000 4.com email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com sebastien.000 775 750 730 702 Name Marshall Parke chris Kojima Peter Wilson Sebastien Burdel Stephen Can Ian Charles Marc Weiss Philip Viergutz Olivier Decannière Elly Livingstone Guy Rico Gregory J.com andre.com firstname.lastname@example.org email@example.com 4.Appendix .644 5. Pfohl Dayton T.200 6.589 firstname.lastname@example.org sam.700 email@example.com 8.com marc.000 8.400 3.M ($m) dedicated to secondaries 15.robinson@svgcapital.U.800 firstname.lastname@example.org 12.500 3.com stephen.aubert@lgt. Holden Mark McDonald Brian Talbot André Aubert Matthew Arkinstall Harvey Lambert Jeff Giller John Wolak Sam Robinson Charles Soulignac Jarrod Fong Henri Isnard Tom Kerr Charles Smith Edgar J.com c.com harvey.com email@example.com charles.com olivier.060 917 firstname.lastname@example.org Database of the dedicated secondary buyers (LPs interest and direct) A.email@example.com 978 1.weiss@partnersgroup.
2009 – Companies website .com firstname.lastname@example.org friedrich.com email@example.com firstname.lastname@example.org - Company Millennium Technology Ventures PEIFunds Auda Private Equity LLC JP Morgan Private Equity Limited Permal Capital Management Willowridge Partners Industry Ventures Unigestion Madison International Real Estate Headway Capital Partners Vintage Investment Partners (Ex Vintage Ventures) Beleveron Real Estate Partners RCP Advisors Symmetry Investment Advisors BEX Capital Anchor Capital Cubera Private Equity Nottingham Capital Management NorgesInvestor Gutmann Group MidCoast Capital The Aldenwood Group Ant Global Partners Capital Dynamics Hollyport Capital TMT Capital Partners Live Oak Secondary Performance Equity Management TOTAL Name Dan Burstein Chuck Stetson Thimothy Brody Troy Duncan Robert DiGeronimo Jerrold Newman Justin Burden Hanspeter Bader Michael Siefert Christiaan de Lint Abe Finkelstein Paul Oldland Tim Danis Marshall Greenwald Benjamin Revillon Jens A.M ($m) dedicated to secondaries 700 684 600 544 575 535 500 279 300 244 225 200 200 171 122 100 100 100 37 32 12 . Turmell Harbert Mulherin Charles Froland Position Managing Partner Managing Director Managing Director Managing Director Managing Director Managing Member Principal Managing Director Managing Director Founder and Partner General Partner Managing Director Senior Managing Principal Principal Managing Partner Managing Partner Managing Partner Managing Partner Managing Director Partner Managing Partner Managing Partner Managing Director Managing Director Chairman Managing Partner Managing Partner CEO Mail burstein@mtvlp. Pilson Dylan Wolff Friedrich Strasser Michael Cuneo Jamie Hale Shunsa Hayashi David Woolford John Beatty Thomas M.com email@example.com@jpmorgan.at firstname.lastname@example.org info@belveronpartners.Dow Jones.com email@example.com firstname.lastname@example.org christiaan@headwaycap.U. Wilhelmsen Jørgen Kjærnes Michael T.sg email@example.com firstname.lastname@example.org troy.com email@example.com Comments Listed vehicle Only Real Estate Only Israeli funds Only Real Estate Raising 1st fund Focus on Asia 117.com firstname.lastname@example.org jaw@anchorcapital. «Guide to Secondary Market Buyers».com email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com Source: Author’s own.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org@gutmann.Appendix A.com rdg@permal.
com email@example.com firstname.lastname@example.org email@example.com dwbaum@s1capitalpartners. 2009 .000 880 489 400 269 250 122 131 120 110 100 88 55 20 Name Alister Wormsley Ken Sawyer David Wachter Joseph Haviv Michael Kelly Bjarne Lie Gretchen Knoell David Tate Otello Stampacchia Martin Weiblen Anthony Buffa Andrew Reilly Dietrich Ulmer Michael Bennett Michael Low Paul Misir Jane Crawford Tom S.com m. Anthofer Parker Brophy David Baum Position Managing Partner Managing Director Managing Director Managing Partner Managing Director Chief Investment officer General Partner Managing Partner Managing Director Managing Partner Managing Partner Managing Director Managing Partner Managing Partner Partner Managing Partner Managing Partner Managing Partner Managing Partner Managing Partner Mail alister.com firstname.lastname@example.org annette. «Guide to Secondary Market Buyers».com Comments Company Vision Capital Saints Capital W capital partners Protostar Partners Nova Capital Management Verdane Capital Advisors Lake Street Capital Tempo capital partners Omega funds Heidelberg Capital Annex Capital Endeavor Capital Management Accretive Exit Capital Partners SMAC Partners Azini Capital Shackleton Ventures Morning Street Capital Chamonix Private Equity Cipio Partners Mustang Capital Partners S1 Capital Partners Only healthcare companies 17Capital TOTAL Pierre-Antoine de Selancy email@example.com@visioncapital.com Preferred equity and mezannine financing to PE portfolio owners Source: Author’s own.300 1.139 Database of the dedicated secondary buyers (only direct transactions) A.com parker.com jane.schneider@tempo-cap.U.com firstname.lastname@example.org email@example.com michael.brophy@mustangcapital.Dow Jones.firstname.lastname@example.org gknoell@lakestreetcapital.Companies website .Appendix 2.com email@example.com 1.bennett@azini.M ($m) dedicated to secondaries firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org Managing Partner email@example.com bjarne.k.com firstname.lastname@example.org michael.2 .
com jmolina@altamarcapital.M ($m) dedicated to secondaries 1.com email@example.com gartht@altius-associates.Appendix firstname.lastname@example.org steve.com tim.com email@example.com firstname.lastname@example.org christophe.ch richard.com.140 Database of firms investing part of their funds in the secondary market A.100 800 340 244 250 250 250 237 200 200 147 100 85 75 75 73 72 61 Name Paul R.com email@example.com@amundi.com Comments Company Portfolio Advisors LLC Stepstone Group SL Capital Partners Altamar Key Capital Corp VenCap International Venture Investment Associates Wilshire Private Markets Group Thomas Weisel Asset Management Northen Trust Corp AGF Private equity Kensigton Capital Partners Fort Washington Capital Partners Altius Associates Montagu Newhall Associates LLM Capital Partners Abbott Capital Management Paragon Partners Access Capital Partners ACP Investment Group Aldius Capital Allianz Private Equity Partners Alpha Associates AG Amundi Private Equity Funds Only directs Only directs .com peter.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org patrick_knetchi@standardlife.U.com tkennedy@kcpl. Crotty Tom Keck Patrick Knetchi José Luis Molina Bart Shirley Tim Cruttenden Cliff Gilman Amanda Ulczynski Clifford Meijer Brad Dorchinecz Christophe Simon Tom Kennedy Stephen Baker Garth Troxell Ashton Newhall Frederick Moseley Charles van Horne Edin Hadzic Philippe Poggioli Saul Meyer Claus Zellner Peter Derendinger Richard Dalaud Position Managing Director Chief Investment Officer Investment Director Partner Managing Director Director Managing Director Associate Managing Partner Vice President Investment Manager Managing Director Managing Director Partner General Partner Managing Director Managing Director Managing Partner Managing Partner Managing Partner Managing Director CEO Manager Mail email@example.com@apep.com firstname.lastname@example.org .com ashton@montagunewhall. email@example.com firstname.lastname@example.org@vencap.com email@example.com@fortwashington.
firstname.lastname@example.org amit.dupont.com shall@calstrs. Landman John Danielsen Carmen Gigliotti Hamish Mair Herman Spruit Amit Dabas Joseph Thomas Dan Reeve Phillip M.com info@finama-pe. Fuhrman Position Analyst Partner Director Managing Director Partner Portfolio Manager Mail vcampion@arcano.U.com email@example.com dan@horsleybridge. Taylor William A.com nick.ca Comments Only Real Estate Only directs Partner Principal Managing Partner Managing Director Diirector Managing Partner Managing Director Managing Director General Partner Managing Director Managing Partner admin@centinelacapital.M ($m) dedicated to secondaries Name Vanessa Campion Torben Vangstrup Nick Mansley Paul Goodson Albert Chiang Set Hall Mark Wiseman Robert D.com carmen.it firstname.lastname@example.org@avivainvestors.dabas@guggenheimpartners.Appendix .com email@example.com firstname.lastname@example.org paul.com email@example.com@usa.com firstname.lastname@example.org - Company Arcano Capital ATP Pivate Euqity Partners Aviva Investors Barclays Private Equity Bay Hills Capital Blue Capital California State Teachers Retirement System Calpers Canada Pension Plans Carlyle Group Centinela Capital Partners CMS Fund Advisors Inc. Danske Private Equity DuPont Capital Management F&C Private Equity Finama Private Equity Frontiers Capital Partners Guggenheim Partners Hovde Private Equity Advisors Horsley Bridge Partners Invesco Private Capital Itaventure Capital Partners Macquarie MSD Capital A.com email@example.com firstname.lastname@example.org Interest in India funds .com email@example.com phil_shaw@invesco. Shaw Michele Gardelli Glen R.es firstname.lastname@example.org csr@cppib.
email@example.com firstname.lastname@example.org private.com andrew.uk email@example.com private.com firstname.lastname@example.org cvberger@avida-group.Appendix A.com email@example.com Comments Clemens von Berger Robert Towler Timothy J.au firstname.lastname@example.org@sig.com timothy.M ($m) dedicated to secondaries .us patrik. Mills Erol Uzumeri Charles Merritt Philip Godfrey Michelle Davidson Stephen White Gordon Hargraves Henk Saeijs Position CEO Investment Officer Partner Principal Senior Vice President Managing Partner Director Managing Director Managing Partner Partner Partner Mail jean.com email@example.com@firstname.lastname@example.org email@example.com@hermes.com firstname.lastname@example.org maneck.com pcg@pcgfunds.Companies website .vorndran@ventizz.Dow Jones.equity@robeco.U. Reynolds Andrew Raisman Tod Chaffee Helmut Vorndran CEO Partner Managing Director Director General Partner CEO Only directs Emerging market Only Directs Only directs Only directs Listed PE vehicle Source: Author’s own. «Guide to Secondary Market Buyers».de email@example.com firstname.lastname@example.org@email@example.com garrett.142 - Company Natixis Private Equity New Jersey State Investment Council Northsea Capital Oak Hill Ontario Teachers Pension Plan OPSEU Pension Trust Parish Capital Pathway Capital Management PCG Asset Management Quay Partners Rho Capital Partners Robeco Capital Susquehanna International Group Teacher Retirement System of Texas Triginta capital Turan Corporation Von Braun & Schreiber Private Equity Partners Hermes Private Equity Institutional Venture Partners Ventizz Capital Partners Bregal Investments Conversus capital Nordea Private Equity Name Jean Duhau de Berenx Maneck Kotwal Patrik Nevsten Jeffrey M. 2009 .com h.
Request for sponsorship .Appendix .143 - 3.
144 - 4. Newsletter nº1 .Appendix .
Appendix .145 - .
com Comment IBD Team Call on 19th January 2010. 6. Call on the 10th March 2010 at 14:00 UK time. Fidequity Adviser Conf. HarbourVest Partners Buyer Buyer . SJberwin Marketplace Legal adviser 12.com firstname.lastname@example.org karabelnik@breslin. Call 3rd December 2009 16h00 UK Time Call on Wednesday 02nd Dec. 2009 15:30 (UK time). 2009 17:00 Call on Wednesday 2nd Dec. 9. Meeting 3rd March 2010 at 14:00 Meeting 3rd March 2010 at 14:00 Conf call on 26th Nov.ch email@example.com marencic@campbell-lutyens. Call on 8th March 2010.com Liaudet@campbell-lutyens.hunet@ubs. 2009 17:30 Meeting on Monday 14th Dec.com idelamora@altamarcapital. Secondmarket 11.com 10.com 3.es rmiro@arcano. UBS Private funds Group Agent type Adviser Contact Stéphane Vojetta Nicolas Lanel Francesca Paveri Position Executive director Executive director Analyst Mail stephane. 5. call on 3rd December 2009 16:00 UK time Conf.com isabel. 2009 at 21:30 Meeting on Monday 14th Dec.firstname.lastname@example.org@fidequity.paveri@ubs. email@example.com - 5. 7. 2009 at 10:00 AM Call Wednesday 9th Dec.com amit. 2009 17:30 Call on 15th and 20th of January 2010 Call on 9th March 2010. 2009 17:00 Meeting Monday 07 Dec.com pwilson@harbourvest. 2009 17:00. 2009 13:00 UK Time Call Tuesday 01st Dec.com firstname.lastname@example.org@ubs.com vcampion@arcano. Arcano Capital Buyer Vanessa Campion Steve Sceery Ricardo Miró-Quesada Francois Garcin Christophe Tymen Amit Sanghvi David Karabelnik Christiaan de Lint Mark O'Hare Kerry Pogue Thomas Liaudet Julien Marencic 8.com roberto.com jsosadelvalle@lexpartners. Other call made in December.com jbollerman@secondmarket. 2009 15H00 UK Time. 2009 13:00 UK Time Call on Wednesday 09th Dec. 14:00 UK time Buyer email@example.com@fidequity.es francois.es ssceery@arcano. Lexington Partners 13.Appendix . Call on 19th January 2010. Model comments Call on Wednesday 09th Dec.firstname.lastname@example.org email@example.com nicolas. Model and sale structures comments Meeting on 18th March 2010 18:00 Meeting on 18th March 2010 18:00 Meeting on 18th March 2010 18:00 Jasmine Hunet 2. Breslin AG Headway Capital Partners Preqin Campbell Lutyens Adviser Buyer Adviser Adviser Call Thursday 10th Dec. 2009. Comments on model Meeting Monday 07 Dec. Bollerman Isabel Rodriguez Roberto Pomares Botana José Sosa del Valle Peter Wilson Analyst Analyst Vice President Associate Partner Partner Associate CEO Founder and partner Founder and Managing Director Head of research Principal Vice President Principal Senior Associate Principal Senior Associate Director LP interest Partner Partner Senior Associate Managing Director jasmine. Sponsors of the study and interviews Company 1. Altamar Pantheon Ventures Buyer José Luis Molina Ignacio de la Mora Francesco Di Valmarana Arantxa Prado Jeffrey C.com firstname.lastname@example.org francesca.
sourcing of transactions. b) What are the returns and IRR you are looking for? c) How do you project the unfunded commitment? (In order to project cash flows) . Growth. last closed operations. b) Company profile: Leading buyer on the secondary market. 2) Market insight: a) Could you send me historic data of primary and secondary fundraising? b) What was the transaction volume on the market from 2000 to 2009? c) Correlation between primary fundraising and secondary transaction volume (turnover rate. Will JP Morgan sell its PE unit? $8bn? Will it occur this year? Goldman will give up bank status? Other banks plan to sell h) Which advisers do you work with? i) What are the typical fees of advisers on the market? 3) Structuring of the operations: a) What are the different possible structures on the market? b) In case of a structured operation (JV) do you consider the counterparty risk as an issue? 4) Valuation Issues: a) Could you describe your valuation method of this asset class? (Bottom-up/Topdown?) Multiples. AUM. targeted assets (size. funds. Model. average age of funds sold)? d) How do you see the future of the market? (Tightening of the Bid/Offer spread. potential buyers. Meeting guidelines Meeting guidelines 1) Presentation: a) The project: Thesis.Appendix .147 - 6. funding ratio). market). sponsors. correlation between primary and Secondary PE market) e) Nowadays who are the main sellers on the market? And what is their main reason to sell? f) What about the pricing? (Current and outlook) g) Could you describe a classic transaction process? Obama bank project: Citi deal ($10bn on the sec.
indemnifications…) b) Does a GP have a right to veto the transfer of a limited partnership interest in a fund? Other: Review and comments of the model . Growth of underlying.Appendix . exit timing…) 5) Legal issues: a) What are the legal issues when considering buying/selling a LP stake? (pre-emption rights.148 - d) Are listed Investment trusts a good proxy for valuation? e) What are the main components of the value of a secondary asset? (Funding ratio.
team stability …) as well as on the expected use of the unfunded (new investments vs. Historical returns data sourced from the “VentureXpert” database can be used to project return multiple and timing. but when modelling.149 - 7. The profile mainly depends on (i) remaining unfunded to be called.0x return multiple and a 20%+ IRR. 7. b) Capital Calls & Distribution Profile You need to project the future capital calls/distributions profile for your portfolio. Three other investment funds shared their thoughts with me but asked to remain anonymous. expected return on NAV and expected return on unfunded (ii) timing of capital calls & distributions. These target returns are adjusted when modelling non vanilla sale structures which have different risk profiles. calls that have allowed me to gain much information of this study. c) Consideration Relative to the Unfunded Commitment: The return multiple assigned to the unfunded part of a commitment mainly depends on the overall economic outlook. we generally assume that a typical secondary buyer looks for a 1. .Appendix . Pricing / Valuation a) Secondary Buyers’ Target Returns All depends on each buyer’s cost of capital. These summaries are in chronological order. All errors are mine. quality of the GP (track record. Summaries of calls and meetings This part contains the summary of the various meetings. follow-on investments…). from 16h15 to 17hoo Subject: Valuation issues.1 Call with UBS (26 November 2009) Call UBS 26th November Contact: Jasmine Hunet (UBS Private Funds Group – Secondary Market Advisory. Analyst) When: 26th November.8x-2. modelling and structuring of operations Content: 1.
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d) Considerations Relative to Management Economics To model the carried interest, you have to do it step by step 1. Hurdle rate or preferred return to LPs is around 8% 2. Then there is a catch up for the GP 3. Lastly profit is shared between LPs and GP (80/20% for a 20% carried interest) There are two different ways of computing the carried interest - US: Deal by deal - EMEA: Calculated at the overall fund level
2. Structuring Alternatives
Different sale structures can be used to sell a portfolio of LP interests: - Straight sale: Plain vanilla sale. In current market conditions, discounts are still substantial (approx.: 30/40% discount) for average quality buyout funds - Joint-Venture Sale, used to minimize discount. The assets are placed into an SPV owned by seller and buyer. The distribution waterfall is then negotiated (and is often asymmetric) - Seller financing: The seller finances part of the price paid by the buyer via a loan of (for example approx. 30% of the price). You can add a mechanism of “revolver” to cover capital calls as well. - Listing of the Portfolio. Not used today because of market conditions - Securitization. Not used today either.
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Call with Secondmarket (01 December 2009)
Call Secondmarket 01st December
Contact: Mr Jeffrey Bollerman (Head of Limited Partnership Interests Marketplace, New York) When: 01st December, from 09:30PM to 10:15PM Subject: Marketplace for illiquid assets. Content:
1. Company Profile
Secondmarket is the largest independent marketplace and auction platform for illiquid assets with over 4,000 participants and height asset class traded on its online platform. Secondmarket is a fast growing company providing intermediary services. It competes with every other intermediary. Other online platforms as Preqin (more based on research publication) and NYPPEX (which seems to be quite absent on the market nowadays) are smaller than Secondmarket. They do not provide advisory on any of those transactions and can offer a low cost intermediary service. Instead of all Investment Banks and Boutiques, Secondmarket positions itself as a fast growing company on a low-cost model based only on intermediary services. It employs 100 people.
2. The LP Interest market:
a. Size of the market, growth rate: With nearly $2bn in LP interests listed, Secondmarket is the largest marketplace of LP interest in Private Equity, Venture capital, Funds of funds and Hedge funds. Mr Bollerman could not give me the actual growth of the market because of the confidentiality of this information but he told me it was an exceptional fast-growing market. b. Sellers on the market, reasons to sell Sellers are mostly financial institutions in terms of transaction volume, but are also endowments, Corporations, high net worth individuals, pension funds…
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The main reason to sell is to rebalance the portfolio because of change in the strategy, poor results, denominator effect… Also many sellers are in distressed situation.
c. Pricing on the market Mr Bollerman could not tell us the actual discount on the market because of confidentiality but also because it depends on each asset. For him the unfunded is the major determinant of the pricing. Also quality of GPs and of underlying assets are other determinants.
3. The process on the market:
Participants enter online on the market and meet anonymously on the platform. Once they have agreed on deal conditions (price, other conditions), they get identified and they close the deal. Fees depends on the sale proceeds, they are generally around 3%. If the transaction price is too low to cover fixed cost of the platform, then other fees are added.
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Call with Breslin AG (02 December 2009)
Call Breslin AG 02nd December
Contact: Dr. David Karabelnik (CEO Breslin AG) When: 02nd December, from 10:00AM to 11:00AM Subject: Market insight, transaction process. Content:
1. Why this market is a hidden-market
Two reasons justify why this market is hidden: It is a New Market: The PE secondary market is all new. Since 2002/2003, the market exploded with much more deals and fund raised. Nowadays it is considered as an established market but because of the wide spread between Bid and offer it remains inefficient. It is a Private Market: Agents working on this market do not want it to become public. It is a secret market; people do not want their assets to be known as on sale. Confidentiality is a key for success on the market. That is why agents always sign CDAs (Confidential Disclosure Agreements).
2. About Mr Karabelnik and his company Breslin AG:
Mr Karabelnik is a Doctor in Biochemistry; he first began as an entrepreneur in Biotech. In 1999 he came back from San Francisco with a background in Venture Capital. He met Dresdner Bank and decided to set a vehicle with them to invest in Venture Capital. For this purpose, he founded a Joint-Venture with Dresdner: Breslin Biotech. In 2003, after the bubble crisis, the Private Equity secondary market began to grow because of concerns from banks to go out from this asset class. At this time Dresdner sold a portfolio of VC and PE assets (mainly to Axa and Harbourvest). Mr Karabelnik then brought part of the Dresdner team to Breslin AG and they began working on secondary transactions with a focus on buyers in 2004. They quickly realized fees where much better working for sellers. That is why in 2005, they began going out on the market and look for sellers. Their clients include many big companies such as Bayer, Henkel, Roche…
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In those big companies the realisation of transactions is easier because they are not so much price-sensitive and accept discounts of the market. Breslin is an intermediary and an adviser on the market more focused on Venture Capital. Valuation advices are mainly based on the current discount to NAV of the market.
3. Market insight:
a. Pricing on the market: The market is clearly offering large discounts to NAV. In the peak of the crisis discounts were up to 50/60%. But now things are coming back and discount is tightening, it will now be around 40% of the existing NAV. The gap between bid and offer is likely to tighten because of the amount of money on the market. Buyers are sitting on large amounts of money and are likely to invest it revising their pricing. For example Mr Karabelnik during a process did not accept a bid from a fund and 6 months later the bidder came back with a revised and more acceptable price for the same asset. b. Size of the market: There are clearly a lot of people who want to sell and a lot of money raised by buyers. Mostly transactions led by Mr Karabelnik are likely to realize between 6 weeks and one year. When Breslin goes on the market to find asset for sale he contacts 50 potential sellers, get 10 closest conversations and finally sign an exclusive agreement with 3 to 4 sellers. They get c.5-10% of the potential sellers.
4. The transaction process:
Go on the market to find sellers: Advice them on value (give them price range). Sign an exclusive sale agreement Get all the info (financials, LPAs…) Sign a CDA with GPs to allow communication Go on the buyer market and pitch clients. Database of c. 200 buyers. At this stage of the process Seller and Assets are not disclosed. - Sign a CDA with interested buyers to provide them with more information - Auction of asset - Negotiation with Breslin to agree on a price - Closing: Sign sale and legal agreements. Fees are based on success fees of c. 3,5-5% of the transaction value with addition of retainers for sale of direct investments of c.4,000 to 5,000€/month because of the complexity of the work. -
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Email from Preq (02 December 2009) Preqin
Mail Preqin 02nd December
Contact: Kerry Pogue (Head research Secondary PE market) When: 02nd December, by mail to replace a call Subject: Market insight. Content:
1. Preqin Company profile:
a. Activity: There has been some talk recently regarding online exchanges and the scepticism around them. We do not aim to do this. We aim instead to provide an information service and network to help inform buyers, sellers and advisors, and to bring them closer togeth together. Preqin’s secondary market monitor service creates leads for buyers and sellers in two ways. Firstly, we call investors to find out their secondary market plans and then we provide this information in the form of a database. Secondly, we have created a confidential network whereby sellers of fund interests can come anonymously to the service and submit fund interests for indicative valuations, both from Preqin’s algorithmic model and from third party buyers subscribed to our service. A buyer can submit a rough price indication and make initial contact with the seller but any transaction is not completed through Preqin’s service. It is completed between the buyer and seller externally. b. Competitors Other participants in the market are Secondmarket, Investor Flow and some other Investor online trading platforms (often initially set up for the trading of hedge fund interests) which have begun to look at adding private equity fund interests to the assets they trade. However, as far as I know, we are the only service to offer free pricing indications. NYPPEX to acts as our exclusive pricing partner and guarantee to provide price indications to anyone that submits a portfolio for third party price indications. We do not provide advice on the secondary market. Rather, we pro provide information and data.
2. Valuation method: A proxy to Listed FoF’s
With regards to the online algorithm, we have demonstrated a correlation between listed private equity and secondary market pricing and therefore use listed private equity as a proxy and take the following into consideration: type of fund; vintage year of fund; fund manager track record; fund performance; amount of capital called. We also assess market trends and factor these in accordingly.
Listed FOFs: another closed box until they issue additional securities.Appendix . Who are the main sellers: I would say that all LPs could benefit from selling for strategic purposes. 4. For example. A decrease in distributions from fund investments has therefore hit them particularly hard. with no income and they often employ an over commitment strategy. Endowments: ‘a closed box’. unfortunately. b. providing the prices are right. reducing administrative burden. Market insight: The research report which will be released next week freely on the website will cover this point. but there are a few firm types that are particularly susceptible to selling. They’re a good indication for the volume of selling we should expect and their selling activity is generally welldocumented as a result of their public status. Reasons to sell: I would say there are two types of reasons for selling fund interests: a) liquidity requirements b) strategic purposes. Strategic purposes would include rebalancing investment portfolio. Again. it does give a good general indication of the fund interest’s approximate worth on the secondary market and we have received lots of good feedback regarding the accuracy of the indications. mainly for liquidity requirements. However. the financial turmoil of 2008 rendered them unable to fulfil the role of financier. prompting many to reduce their exposure to an asset class that never did form a core part of their investment strategies. I’m unable to go into any more depth with an explanation of the model. banks have been keen to offload illiquid assets including private equity fund interests. they employ an over commitment strategy and have probably borrowed too much. one secondaries manager has purchased portfolios from the same bank 3 times over the past 15 years. Banks: Banks tend to enter and leave the PE market in cycles. . In order to generate liquidity.156 - We feel that while this method cannot be substituted for a thorough due diligence of the fund’s underlying assets. many banks were initially attracted to the private equity market by the opportunity to provide finance in the form of leveraged buyout deals. gaining exposure to top managers that the LP may have missed in the primary round of commitments etc. Furthermore. 3. who are the main sellers and why: a.
the valuation process is to make a market valuation. then the distribution is shared. Legal issues: It mainly depends in which jurisdiction the fund belongs to. Fidequity company profile Fidequity is an adviser in Private Equity which mainly focuses on Secondary operations and fundraising. The lowest the funding ratio. Valuation issues In general the GP do not release enough information in its financial reports to value each underlying asset. Paris and New York. assets and Capital Call/distribution profile. 4.Appendix . Content: 1. cash flows are discounted at the targeted IRR and the NPV is the price the buyer is willing to pay. structuring. the market discount of same vintage funds is used. The market discount is then applied to the NAV of the fund provided by the GP. from 5:15PM to 5:45PM Subject: Valuation.157 - 7. 2. a bottom-up valuation is done valuing up underlying assets. In the case of enough financial information a available. the lowest the price because investors do not like backing managers they do not know. Structuring of the operations: Mainly two structures: -Straight sale . It also depends if the fund is an FCR or a limited Partnership Partnership. . 3. The buyer answer all capital calls but gets a preferred return until he reaches a targeted return. It is a global group with offices in London. In this case. Depending on the Funding ratio of the fund.5 Call with Fidequity (03 December 2009) Conference call Fidequity 03rd December nce Contact: Mr Christophe Tymen (Partner) and Mr Amit Sanghvi (Associate) When: 03rd December. legal. A new NAV is estimated and depending on the capital call/distribution profile of the fund.Joint venture: Buyer and seller share the economics. A sensitivity analysis is done on growth assumptions of underlying .
a fund can add 8% on the previous percentage of transferable assets. However. by using a qualified service (defined by the IRS) on the secondary market. The GP do have a veto right on a secondary transaction of a LP stake in its fund. . you have to prove that your fund is illiquid and not traded on a public place. but the limited partners pay it. A Limited Partnership does not have to pay tax. It means there is no double taxation on income.158 - Basically pre-emption rights and remaining liabilities of previous LPs are issues considered during secondary transactions. In order to be considered as a Limited Partnership. That is why a Limited Partnership can’t transfer more than 2% of committed capital each fiscal year whether it will be considered as a Public traded partnership (and taxation also) by the IRS.Appendix .
€ 1bn.159 - 7. This fund only invests in funds Altamar already invested in on the primary market. Today the denominator is no longer a reason because boards voted to lift threshold of the Private Equity allocation and also because large pension funds forced GPs to write-down their NAV. For Mr Molina. $4 bn. however it seems that the volume of transaction was c. in H1 2009. Main reasons of selling were distressed situations and the denominator effect. 2. legal. Its funds have a capacity to invest until 20% of committed capital in secondary transactions. no clear correlation exists between the primary Private Equity market and secondary transactions because each market relies on different drivers. They believe the tightening of the bid/offer spread will happen when the visibility and macroeconomic conditions will better. . in 2008 and c. invested mainly in LBOs (80% of AUM) and Real Estate (20% of AUM). Altamar company profile Altamar is a Private Equity fund of fund founded in 2004. from 5:00PM to 6:45PM Subject: Market insight. structuring. Content: 1. Valuation. It is a market similar to the Real Estate one because it is a buyer market where agents are looking to buy quality assets and where sellers are mostly distressed and have to sell with a discount to the real price of those assets in the future. Today sellers are mostly listed fund of funds (because of over commitment strategy and high leverage breaching of covenants) and family offices (mainly distressed sellers). $16 bn. Market insight The size of the secondary market is really difficult to determine. Recently they opened a new fund dedicated to secondary operations. Altamar currently has three funds and asset under management of approx.6 Meeting with Altamar (07 December 2009) Meeting Altamar 07th December Contact: Mr José Luis Molina (Partner) and Mr Ignacio de la Mora (Investment Director) When: 07th December.Appendix . modelling. They use to invest in early secondary (50/60% funded) looking for 2x returns.
The Share Purchase Agreement (SPA) Particular attention has to be paid if remaining LPs have pre-emption rights (ex: Blackstone). - 5. Modelling: Mr de la Mora reviewed the valuation model.160 - 3. A bottom-up valuation has to be performed in order to value underlying assets. when buying in the US. A new NAV is estimated and depending on the capital call/distribution profile of the fund. Structuring of operations: Altamar only buy assets via straight sale. Structures where the buyer and the seller share the economics (like JV) are not used because of the risk of bankruptcy. cash flows are discounted at the targeted IRR and return. Valuation issues In order to value this asset class. Underlying is valued via EBITDA multiples. Also for fiscal reasons because an FCR cannot invest in a structured note. they have to invest in Private Equity funds if they want to keep their tax treatment. if you want to benefit from the local tax treatment you have to buy a resident vehicle.Appendix . a simple market valuation (applying a discount on the GP’s NAV) is not a good method. Discussions were on the following elements: Growth assumptions Cash flow for debt repayment Waterfall Management fees/Carried . Legal issues: Two most important legal issues: Existing legal agreement of the fund: not applicable for Altamar because they only invest in funds where they already invested in primary. The cash is not an issue because it is always an insignificant part of the fund and usually the final price paid for the asset is corrected by the existing cash. GP consent is required in secondary transactions. The NPV is the price the buyer is willing to pay. it is not possible to do it via a DCF method because we need to approach the value of the assets in the time. 4. for example. 6. . Also fiscal issues have to be considered. A sensitivity analysis is done on growth assumptions of underlying assets and exit timing.
invested mainly on the primary (80% of AUM) and on the secondary market (20% of AUM). Generally Secondary funds perform better than Primary in terms of return. On the secondary market they mainly invest (85%) in funds where they already participate in the primary. which should be likely to tighten the gap between the bid and offer on the secondary market. $30 bn. Balance sheet issues: Risk capital allocation.5 bn. legal.5 bn.Appendix . Regulation. in 2008 and c. $ 23bn. insurance companies and endowments.161 - 7. Transaction volume should be approx. change strategy. Banks and insurance companies. from 11:00AM to 12:00AM (UK time) Subject: Market insight. Pantheon currently manages approx. $23. however it seems that the volume of transaction (Purchase Price + Unfunded) was c. in 2006-2007. a 5 to 15% premium to NAV was paid. Quoted investment trusts give a good proxy for valuation. Valuation. Today listed investment trusts show a reduction in the discount to NAV. Pantheon has been a pioneer on the Private Equity secondary market beginning its activities on this market in 1988. In 2010 the market is likely to be much more important than in 2009. in H1 2009. structuring. 2. Content: 1. $5. Market insight The size of the secondary market is really difficult to determine. Portfolio allocation: Rebalance portfolio. Players mainly sell on the secondary market for three different reasons: Cash flow distressed: It can be every players but it is mainly the case for family offices. . Pricing on the secondary Private Equity market was very similar. Pension funds. Today Pantheon is the fourth biggest player by assets dedicated to this market.7 Call with Pantheon Ventures (09 December 2009) Conference call Pantheon Ventures 09th December Contact: Mr Francesco Di Valmarana (Principal) and Mrs Arantxa Prado (Senior Associate) When: 09th December. Pantheon company profile Pantheon Ventures is a Private Equity primary and secondary fund-of-funds manager founded in 1982. They use to invest in late secondary (60/70/80% funded).
Legal issues: Indemnities: In case a GP sold an asset and need to call back distribution. They have also used other different structures using SPV and sharing the economics where the counterparty risk is carefully assessed. Intermediaries come up with a list of assets and their characteristics If the buyer is interested by an asset he makes an initial bid: 1month More information is given to the different parties who have to make a final bid: 1month Closing of the deal: Legal (SPA. cash flows are discounted at the targeted IRR (20/25% for Pantheon) and return (1. A new NAV is estimated and depending on the capital call/distribution profile of the fund.162 - There are two types of classic transaction process depending on where the deal is sourced: • • Deal sourced via an intermediary: The transaction process last mainly 3 months. - 5. the main component of the value of a secondary asset is the quality of the underlying.8x to 2x for Pantheon). Structure of transactions Pantheon mainly buys assets agreeing on a price with differed payments. 4. Valuation issues In order to value this asset class. 3.…) 1 month. The unfunded is separated and valued in two parts: The part which will be used to back existing investments: This part is projected as per returns expected of each investment in existing business. Typically adviser fees are c. A sensitivity analysis is done on growth assumptions of underlying assets and exit timing. For an early secondary the main component would be the funding ratio. The cash is not an issue because it is always an insignificant part of the fund however it is included in the model. it is not possible to do it via a DCF method because we need to approach the value of the assets in the time. Composition and agreements in the investor base . Fiscal issues: Tax situation of the vendor. The NPV is the price the buyer is willing to pay. Deal sourced by Pantheon: Same steps as the previous process but is usually a lot more complicated and longer (can last years). . buyer and underlying assets. Underlying is valued via multiples. Generally deal structures are proposed and accorded with the seller. For Pantheon.1 to 2% of NAV + Unfunded depending on the size of the transaction. as a late secondary buyer.The capital for new transactions: On this part the return applied is usually bigger. a bottom-up valuation is performed to value the underlying.Appendix .
163 - Depending of the LPA. In the US. .Appendix . the 2% transfer law is applicable to limited partnerships and 8% can be added to this percentage if the transaction is advised by a Qualified Matching Service (QMS) defined by the fiscal authorities. the GP can have a veto right.
Reasons are also changing in the time. If the GP is not that good then the unfunded is projected at an inferior return to the target one in order to penalise the value for the risk taken. Valuation issues In order to value this asset class. cash flows are discounted at the targeted IRR and return (which for Headway are similar to a primary Private Equity fund). Valuation Content: 1. today people are selling for distressed reasons. However it is difficult to determine its future. before it was corporations.Appendix .8 Call with Headway Capital (09 December 2009) Call Headway Capital 09th December Contact: Mr Christiaan de Lint (Founder and Partner) When: 09th December.€ 200 million invested mainly in Direct secondary (75% of AUM) and in LP Positions (25% of AUM). a bottom-up valuation is performed to value the underlying.164 - 7. 3. Headway currently manages two funds totalling c. They specialize in small to mid-size transactions (<€40m). then banks and today it is everybody. A new NAV is estimated and depending on the capital call/distribution profile of the fund. from 5:00PM to 5:15PM Subject: Market insight. 2. Market insight For Mr de Lint a correlation exists between the primary and the secondary market of around 3 to 5%. before people were selling for portfolio management. . Headway Capital company profile Headway Capital is a Private Equity secondary fund-of-funds manager founded in 2004. The valuation of the unfunded depends on the quality and the reliability of the GP: If the GP has a good track record and is likely to make good investments then the unfunded is not taken into account. Sellers are cyclical. A sensitivity analysis is done on growth assumptions of underlying assets and exit timing.
In 2010 sellers will mainly be Banks and endowments. Endowments should mainly be affected because of their overcommitment strategy to Private Equity and the denominator effect (Public markets dropped more than Private Equity NAV). Indeed. many banks are now focusing on their core business (and are likely to divest non-core activities) and seeking liquidity (for instance to repay government’s loans). Transaction process. The Bid/Ask spread is already tightening but its evolution in the near future will depend on macroeconomic developments and on the change in NAVs (How GPs mark their investment). In 2010 the market is likely to be much more important than in 2009. The company specialises in raising private equity and infrastructure funds from institutional investors worldwide and in advising on the secondary sale or restructuring of portfolios of direct or fund investments. Nowadays the average discount for a portfolio of buyout funds is ca.Appendix .9 Call with Campbell Lutyens (10 December 2009) Call Campbell Lutyens 10th December Contact: Mr Julien Marencic (Vice President) When: 10th December. Structuring. from 02:30PM to 03:30PM (UK time) Subject: Market insight. Valuation.165 - 7. Reasons for selling are the following: . a listed vehicle previously affiliated with AIG.€200m) of APEN. however it seems that the volume of transaction (Purchase Price + Unfunded) was c. On the Private Equity secondary market it advises on the sale or restructuring of portfolios of Private Equity fund or direct investments. 2. Campbell Lutyens company profile Campbell Lutyens is an advisory firm founded in 1988 focused on Private Equity and Infrastructure. in 2009 (apart from sales of single interests). Market insight The size of the secondary market is really difficult to determine. $14/15 bn. Content: 1. in 2008 and will be around $5/6 bn. and can even be closer to NAV in certain cases. They recently closed the sale of the European VC portfolio of 3i and the restructuring and refinancing (c. 20/30%.
Investors then review the information contained in the data room and submit an indicative offer for the assets. Structure of transactions Straight sales are used but also different structures using SPV and sharing the economics. 3. bearing in mind the following caveats: - . which depends on the level of undrawn of the fund.166 - - Liquidity concern Over-commitment strategy Denominator effect Change of strategy / Exit of non-core activities 3.5 to 3. Preparation Phase: Adviser’s due diligence and preparation of the data room 2. (Funds transfer) Typically adviser fees are c. A secondary price is calculated.1. When more visibility on the future use of cash flows is available. future cash flows are discounted at the targeted IRR (depending of buyers’ cost of capital. Valuation issues In order to value this asset class.5% of NAV + Unfunded depending on the size and complexity of the transaction. a bottom-up valuation is performed to value the underlying assets. 4. .8x to 2x). 5. Negotiation and Closing Phase: The preferred party(-ies) enters in exclusive SPA negotiations with the seller until the document is signed. Due Diligence Phase: A short list of investors is made and the short-listed investors get access to more information on the data room so they can refine their due diligence and submit a binding offer. Economic-swap agreements (in which the legal ownership and economics of the assets are decoupled) or Top slicing (in which an investor buys a part of each of the vendor’s LP interests) are also used.Appendix . 5.The capital for new transactions: On this part the return depends on how the GP plans to invest it. Transaction Process All transactions are unique but most transactions can be divided in 4/5 phases: 1. the unfunded component can be separated and valued in two parts: The part which will be used to back existing investments: This part is projected as per returns expected of each investment in existing business. Quoted investment vehicles can be used as a proxy to secondary market pricing. and target IRR marketed to their own investors) to achieve the target MM return (typically between 1. Marketing Phase: An NDA (Non Disclosure Agreement) is signed with each investors to enable them to access the data room. 4.
the NAV of a listed vehicle is based on the underlying NAV of the underlying assets available at the time of reporting (e. overcommitment strategy…). exit market (M&A and IPO).167 - .the share price of listed investment vehicles can be distorted by the lack of liquidity in the shares and/or the structure of the vehicle itself (such as use of leverage.Appendix . . The value of a secondary asset is mainly driven by its underlying assets: trading activity (growth outlook).g. economic environment (entry multiples…). usually NAV from the previous quarter) . manager’s experience and reputation. but also by the unfunded part (depending on the access to investment plans of the GP and on the quality of GPs) and the exit timing.
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Meeting with SJberwin (14 December 2009)
Meeting SJberwin 14th December
Contact: Mrs Isabel Rodríguez (Partner) and Mr Roberto Pomares (Partner) When: 14th December, from 05:30PM to 06:45PM Subject: Market insight, legal issues. Content:
1. SJ Berwin company profile
SJ Berwin is a leading international law firm founded in 1982 delivering legal advice to financial institutions and international companies. With c. 600 lawyers, SJ Berwin is present in 12 different countries. SJ Berwin is a leading adviser in the primary Private Equity sector. They also advise their clients (GPs) and sellers in their client fund on secondary transactions. As a participant on the secondary market they are also involved on the buy-side.
2. Market insight
They advise on transactions of LP interests but also on synthetic transactions where the GP is selling a part or an entire portfolio. The Spanish Private Equity market is really a small market (Biggest fund: Magnum Capital €850m), secondary operations are reduced and players mainly sell for distressed reasons. GPs also sell because of poor performance in their portfolio. Reason to sell is mainly because of distressed situation; however for GPs it can also be to sell a non performing asset/portfolio. Nowadays for a straight sale, discounts are c.25% of NAV.
3. Legal issues
Basically in a transaction process, lawyers have two major roles: To analyse the existing LPA (Limited Partnership Agreement) of the fund: Indeed at the very beginning of a transaction, the GP or even the seller requires to understand what are the transfer conditions and possibilities. Also the potential buyer requires understanding the LPA and will need a summary of all its conditions and characteristics. - To redact the SPA (Share Purchase Agreement): The buyer when closing the transaction will have to redact the adequate legal document transferring assets and remaining liabilities. This part is much more complicated in the case of a synthetic sale (GP direct sale) than in a straight sale of a LP interest. Pre-emption rights: In general funds do not have pre-emption rights in their LPA. However if they do it is a crucial issue when planning to sell a LP position. -
- 169 -
GPs generally have a right to veto the transfer but they generally do not use it. Indeed they more often help the LP to find an investor for its interest in order to reduce the risk of a default in their fund. In case of a LP default, the GP can generally choose between different options: A secondary sale of the LP interest A reduction in the LP’s capital account, typically 25/50% of its investment. Also incurred costs are reducing the investment.
In the case of a synthetic sale, GPs usually do not give much representation (Reps) or warranties to the buyer because they want to get rid of sold investments. In their opinion, the IAFM proposal is not likely to become a law because of the importance of other markets (US and emergent ones). Legal advisers usually work about 30/50 hours on a straight sale of LP interest. For a synthetic sale they work c.500/1000 hours.
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Call with UBS (02 February 2010)
Call UBS 02nd February
Contact: Nicolas Lanel (UBS Private Funds Group – Head of European Secondary Market Advisory Team), Jasmine Hunet (UBS Private Funds Group – Secondary Market Advisory) When: 02nd February 2010, from 3:30PM to 4:30PM (UK time) Subject: Advisers, Market insight, valuation Content:
1. UBS PFG profile
UBS PFG is the advisory group in charge of raising private equity funds from institutional investors worldwide and is advising on the secondary sale or restructuring of portfolios of direct or fund investments. The secondary advisory team is composed of 22 professionals across London and New York. It was founded 6 years ago in New York by Nigel Dawn. The Secondary advisory team focuses primarily on large or structured transactions and has pioneered a number of innovative solutions to maximise value or achieve sellers objectives. The team competes primarily with Campbell Lutyens in Europe and Cogent Partners in the US.
2. Market insight
Dry powder: According to UBS estimates $45bn of dry powder was available to buyers at the beginning of 2010. 2009 transaction volumes decreased to app. $9bn from a peak in 2008 of $20bn. Correlation between the primary and the secondary market: It is estimated that historically, +/-3 to 5% of primary fund commitments are ‘turning over’ in the secondary markets. This number had been rising steadily up to 2009 when market conditions made it prohibitive to use the secondary markets as a portfolio management tool. UBS estimates that volumes should bounce back to in excess of $20bn, driven by the resurgence of large portfolio deals. Outlook for the next years:
Appendix . returns targeted by buyers went up because of the lack of visibility and the associated risk. Expected returns: During the crisis. it went back to ‘normalized’ levels of 15 to 20% IRR and app. 3. combined with sustained regulatory pressure on banks will drive deal flow which will be facilitated by rising valuations supported by rising public markets and underlying NAV’s.8x return for LP portfolios and app. sellers’ ability to drive deal terms will be eroded by human resource limitations at buyers who will have to carefully elect where to deploy their limited human capital. Volcker Rule: Mr Lanel does not think that the Volcker Rule will lead to a sudden wave of transactions by banks given the time horizon which has been granted to them to transaction out of restricted areas. This. liquidity pressure will rise again on certain over-committed investors. . regulatory pressure imposed by Basel II had already put things in motion for banks to dispose of non-core assets in particular in PE and a number of legacy “pay to play” programmes have already been sold down. Valuation issues Listed Investment trusts: Listed investment trusts have provided a good proxy for the secondary markets until recently where they have failed to ‘catch up’ with the marked reduction in discounts. However. Nowadays. However.171 - As the economic outlook further improves and capital calls resume. 1. 25% and in excess of 2x for ‘secondary directs’. as deal flow reaches record levels.
172 - 7. HarbourVest who already invested $7bn in the secondary market has a dedicated secondary team of 24 professionals. the firm spun out and became independent in 1997. secondary and direct investments. The dry powder should be around $20bn in dedicated secondary capital and c.9bn dedicated to secondary investments.12 Call with HarbourVest Partners (09 March 2010) Call HarbourVest Partners 09th March Contact: Mr Peter Wilson (Managing Director) When: 09th March 2010. from 2:00PM to 2:30PM (UK time) Subject: Market insight. +/-3 to 4% of primary fund commitments are exchanged in the secondary market after an average 4 to 5 years. direct investments but also hybrid structures. Its secondary program is currently investing its seventh fund: Dover Street VII. Up to date it manages $32bn in primary. This total $55-60bn of dry powder which will be invested on average in the next 4 years should be compared with a potential transaction volume of about $100bn in the next 4 years which clearly evidences an imbalance on the market The Volcker Rule: Mr Wilson does not think this project will be translated in a similar law. Considering historical data Mr Wilson also see an increase in the percentage of exchanged commitment as per last years. a vehicle of $2. Their secondary investments include LP interests. 2. current discount trend is about 20% to NAV on the market and should remain similar this year because of the constant perceived risk in the market. Market insight 2009 secondary transaction volume: $6-8bn was transacted in 2009 on the secondary market which represents a 25% decline from previous year.Appendix . It should not urge banks to sell their PE division/assets. the trend clearly . Founded in 1982 as an investment division of John Ancock insurance company. Correlation between the primary and the secondary market: Historically. Content: 1. HarbourVest Partners company profile HarbourVest Partners is one of the biggest independent buy-side firm that provides private equity solutions to its clients. Market imbalance: The secondary market is still a buyer market. $35-40bn is potentially available on an opportunistic basis. The Bid/Ask spread is tightening. However. Valuation.
the market value of these assets is distorted by market effects and used leverage. 2x multiple. Expected returns: Returns depend on the type of assets (LP portfolio/Direct deal). a bottom-up valuation is performed to value the underlying assets. They never use a market valuation method (applying the existing discount of asset class and vintage year to the fund’s NAV). . Valuation issues In order to value this asset class. Listed Investment trusts: Listed investment trusts do not reflect an accurate trend of the secondary market.173 - indicates that regulated financial institutions have to watch carefully if they want to keep those assets because of its cost of capital and regulatory concerns (Basel II). 3. However as a general rule.Appendix . Indeed. they are looking to generate mid twentieth IRR and c.
Distinction between secondary advisers and brokers should be made. As the placement agent activity was dramatically reduced in late 2008/2009.13 Call with Campbell Lutyens (10 March 2010) Call Campbell Lutyens 10th March Contact: Mr Julien Marencic (Vice President) When: 10th March. Cogent and Campbell Lutyens. many financial institutions are starting to consider their PE assets as non . in 2009 banks were facing much pressure because of public recapitalization. holding PE assets requires a lot of capital and is therefore very expensive for regulated financial institutions. many placement agents have tried to develop a secondary advisory practice. Market insight. Content: 1. in an attempt to offset their declining fundraising revenues. Indeed. Indeed. M&A. Because of this regulation and of the volume of PE assets on their balance sheets (for instance. Market insight Nowadays the average discount for a mid-quality portfolio of buyout funds is ca. structured or complex deals. PE assets held by banks typically attract capital requirements from 190% to 400% (depending on the regulator and on each bank’s interpretation and application of the rules). 2. Financial adviser market Key advisers on the market are UBS PFG. Since September 2009.174 - 7. Several firms offer secondary transactions brokerage services but few are able to advise and handle large. a number of banks have started to re-assess their PE strategy and potential solutions could include a sale of all or part of their private equity assets. banks used to invest in PE funds in order to gain access to leverage finance deals). Sellers: Mainly financial institutions In 2010 most of the secondary deal flow should come from banks. certain funds even trade at a premium. Since then. from 02:00PM to 03:00PM (UK time) Subject: Financial adviser market. banks have been busy trying to survive in a hostile environment by cleaning up their balance sheet and repaying the public loans they received.Appendix . under Basel II RWA rules. 10/20% and can be closer to NAV in certain cases (best quality funds). restructuring activities or even bankruptcy. Since this weighting is applicable to NAV+Unfunded.
should most of the secondary fundraising targets be reached.Appendix . we estimate that there will be ca. In terms of volume of transactions. if secondary fundraisings are on target) and a historical average deployment period of 3 years. however some signs that competition is intensifying are being perceived in recent transactions. the recovery of secondary market pricing could accelerate/reinforce this trend.175 - “core” and are likely to divest all or part of their holdings. As of Q1-2010. $27bn to this amount. Secondary current and future fundraisings for 2010 could add ca. . CL estimates that the dry powder available for secondary transactions is about $41-42bn (including announced interim closes for current fundraisings). $20bn of transactions per year over the next 3 years. Additionally. Still a buyer market… but not for a long time The market is still a “buyer’s market”. which is consistent with the current dry powder available for secondaries (up to $60bn.
176 - 7. invested globally. Main sources of secondary opportunities are portfolio GPs and family offices. Advisers are also an important source of opportunities. from 06:00PM to 07:15PM Subject: Fund of fund activity and approach on the secondary market. Arcano Capital is a Private Equity fund of funds manager. Arcano company profile The Arcano group. Content: 1. They currently have assets under management of approx. (III) Multi-family Office Advisory. Steve Sceery (Vice President). Approach on secondary assets: Arcano Capital invests on an opportunistic basis in secondary assets.Appendix . € 800 m. Its funds have a capacity to invest up to 20% of the committed capital in secondary transactions. take advantage of market inefficiencies. They usually invest in early secondary looking for at least 25% IRR. 3. gain more exposure to managers they like and to enter funds where they previously did not invest in the past. The secondary market is for them a way to re-balance their portfolios. 2. Ricardo Miró Quesada (Associate) When: 18th March. Market insight NAV levels: Last quarter the general trend of NAV surge 15% mainly due to the increase in EBITDA and valuation multiples of portfolio companies. To this date they have closed one secondary transaction in November 2009 buying an LP stake in a fund where they already have a primary commitment. (II) Alternative Investment Management.14 Meeting with Arcano Capital (18 March 2010) Meeting Arcano Capital 18th March Contact: Vanessa Campion (Analyst). founded in 2003 is an independent company with three divisions: I) Corporate Finance Advisory. . They prefer to invest in funds where they have already invested in on the primary market.
2010 is expected to improve although it is also expected to be a difficult year in terms of fundraising. .Appendix . 20%) to the secondary market on the total dry powder of mainly primary fund of funds. Valuing the dry powder of opportunistic buyers in the secondary market Opportunistic buyers such as mainly primary fund of funds represent a big part of the secondary market volume. we could get a good proxy to the money they can dedicate to this market. However this part of the secondary volume is difficult to value because of the size of deal and of their opportunistic condition. By applying a discount to the traditional allocation of fund of funds (c.177 - Primary fundraising Primary fundraising in 2009 did not meet expectations.
1 Historical transaction volume in the secondary market In $bn Source Inside the growing market for VC Dow Jones Guide to sec Market Permal capital Mangement UBS (presentations) Carta Diem (Lexington Estimates) PE Magazine (PE Analyst) PEI Manager (Cogent/Capital Dynamics) Triago Dow Jones Guide to sec Market Buyers Capital Dynamics Green Park Cap Campbell Lutyens (Mail Mr Marencic) Lexington Partners (Distressed debt report) HarbourVest Partners (Mr Wilson call) Cogent Partners (Cogent and VentureXpert) 1990 1991 1992 1993 1994 1995 1996 1997 1998 0.579 1997 0.2 2.4 2.4 0.494 1999 2.71 1998 1.4 2.2 0.6 1999 2000 0.09 Source: Author’s own .4 1992 0.5 0.579 0. I analyzed the data published by different participants. 8.8 1994 0.35 2.35 2000 3.4 0.6 1.8 Selected data 1990 0. compared it and used the most reliable.5 1995 1 1996 0. In the following analysis the data used for this study is in the grey cells.2 2.2 2.71 1.8 0.5 0.4 1993 0.494 2.5 1 0.Appendix .178 - 8. Analysis of published historical data As the volumes in the market are very difficult to value precisely.6 1.8 0.8 3.2 1991 0.09 0.
468 11 8 12 10 12 10 10.5 16.5 7.268 2007 13.9 20 14.7 6.5 7.5 2.5 8 6.1 1.1 2.35 2008 16.9 5 5 6.7 8.278 2002 2.179 - 2001 2002 2003 2004 2005 2006 2007 8 10/15 11 15 18 13.278 2.468 2006 10.38 2005 7.116 2009 9.1 2.904 2004 8.1 6.092 1.7 10 18 6/8 30 6/7 Selected data 2001 2.Appendix In $bn Source Inside the growing market for VC Dow Jones Guide to sec Market Permal capital Mangement UBS (presentations) Carta Diem (Lexington Estimates) PE Magazine (PE Analyst) PEI Manager (Cogent/Capital Dynamics) Triago Dow Jones Guide to sec Market Buyers Capital Dynamics Green Park Cap Campbell Lutyens (Mail Mr Marencic) Lexington Partners (Distressed debt report) HarbourVest Partners (Mr Wilson call) Cogent Partners (Cogent and VentureXpert) .8 2.8 2.9 5 7 6.1 Source: Author’s own .116 17 6 8.1 1.5 7 6.35 18 15 2008 2009 6.904 4 7 6.268 17 14 20 9.5 13 13.9 7 7 7.38 5.092 2003 6.
2 12.2 18.068 0.5 2003 7.021 2006 6.1 2001 4.425 6 1997 0.741 2005 5.4 7.021 2.653 2.2 16.9 1999 2.961 3.5 1998 2.405 5.812 2005 7.955 7 2000 2.5 2002 3.1 20.1 1. VentureXpert) Preqin (Private Equity spotlight January 2010) Selected data Dow Jones Guide to sec Market Buyers (1996-2008)/Preqin (2009) .6 1996 1.4 1998 2.893 2009 18.068 2003 3.8 1997 0.9 6.316 20 14.8 1996 0.6 8.2 Secondary fundraising Source (in $bn) Probitas Partner UBS PE Magazine (PE Analyst) Dow Jones Guide to sec Market Buyers Green Park Cap JP Morgan AM (Thomson Reuters.7 9 7.445 2.3 3.955 2007 12.Appendix 8.405 2008 7.5 Source: Author’s own .893 5.5 3.180 - 1995 0.7 12.1 10.1 7.1 9.2 2001 6.5 2002 4.3 7.6 6.316 2008 8.653 2004 8.2 2000 2.7 8. VentureXpert) Preqin (Private Equity spotlight January 2010) Selected data Dow Jones Guide to sec Market Buyers (1996-2008)/Preqin (2009) Source (in $bn) Probitas Partner UBS PE Magazine (PE Analyst) Dow Jones Guide to sec Market Buyers Green Park Cap JP Morgan AM (Thomson Reuters.812 5.6 1999 2.425 2004 7.741 2.4 26.245 6.961 2009 30.245 2006 12.445 2007 15.
NVCA.8 146 175 2003 80 85 82.2 143 132.8 1994 33.7 180 1990 21. VentureXpert) 1990 1991 1992 1993 .5 80. Preqin (2009) Source: Author’s own .7 206 183 2004 120 2005 255 250 344 334 2005 255 2006 370 340 535 449 2006 370 2007 455 395 644 585 2007 455 2008 375 255 629 636 2008 375 2009 200 246 221 2009 246 Selected data 2000 2001 2002 Carta Diem/Partners Group/Preqin 250 140 70 Data: Thomson Reuters.3 38.9 1992 17.1 13.4 1993 17. VentureXpert) Selected data Carta Diem/Partners Group/Preqin In $bn Source Partners Group Permal Capital Management Carta Diem (Fuente Private Equity Analyst) Preqin JP Morgan AM (Thomson Reuters.7 2000 250 265 243 250 333 2001 140 155 167.2 1999 132.5 1998 117.8 190 244 2002 70 75 91. Asia Private Equity.3 135 133 2003 80 2004 120 125 126.1 1991 13.5 93 117.6 49.Appendix 8. AVCJ.5 1997 80.9 17.181 - 1994 1995 1996 1997 1998 1999 21.8 33. Dow Jones PE Analyst.3 Primary fundraising In $bn Source Partners Group Permal Capital Management Carta Diem (Fuente Private Equity Analyst) Preqin JP Morgan AM (Thomson Reuters. EVCA.4 17.3 1995 38.6 1996 49.
4 0.494 2.10 3 10% 0. Historical Data $ bn Primary fundraising (Thomson Reuters.904 8.1 13.468 10.4 0.50 6 20% 1.116 9.Appendix .5 80.09 2.2 132.3 38. Preqin (2009)) Secondary transaction volume Dow Jones Guide to Sec.00 10 Total 0% 100% 0.80 5 30% 1.20 7 10% 0.38 7.8 0.35 3.278 2.182 - 9.30 4 20% 0.00 5.1 2.9 17. Secondary market projection model I.4 17.8 33.70 8 5% 0.268 13. AVCJ.71 1.7 250 140 70 80 120 255 370 455 375 246 0.579 0.092 6. Asia Private Equity. EVCA.35 16.5 117. NVCA.Probability of transaction distribution Fund year Probability Average age of fund purchased (years) 1 0% 0 2 5% 0. Market Buyers(1996-2008)/ UBS (2009) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 21.2 0. Dow Jones PE Analyst.40 9 0% 0. Historical turnover Probability 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1990 0% 1991 5% 0% 1992 10% 5% 0% 1993 20% 10% 5% 0% 1994 30% 20% 10% 5% 0% 1995 20% 30% 20% 10% 5% 0% 1996 10% 20% 30% 20% 10% 5% 0% 1997 5% 10% 20% 30% 20% 10% 5% 0% 1998 0% 5% 10% 20% 30% 20% 10% 5% 0% 1999 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 2000 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% .6 49. Assumption .00 3.5 1 0.
39 3.00 3.60% 6.00 7.66 3.86 11.03 8.Appendix Vintage funds potentially brought to market Primary raised 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Historical turnover rate 1990 Total Potential Effective Secondary transactions Effective Turnover rate Weighted average turnover rate from 1995-2002 Weighted average turnover rate from 1995-09 Weighted average turnover rate from 2003-09 Weighted average turnover rate from 2003-08 0.3% 2000 61 3.1 3.50 - 2008 7.00 24.00 12.4 1992 3 0.67 3.87 - 1994 6.268 8.50 14.48 8.00 28.5% 2007 133 13.00 21.00 14.00 42.78 1.89 9.56 3.06 1.8 1994 12 0.6% .93 4.27 12.64 25.00 22.58 7.00 28.56 1.00 16.6 49.41% 7.86 13.39 0.90 14.06 - 1992 2.95 16.00 6.5 1995 15 1 6.00 16.44 39.579 3.64 - 2001 1.38% 2003 141 6.72 11.00 - 2005 5.22 1.1% 1997 24 0.05 23.93 - 1997 1.54 25.48 1.22 3.4 17.1% 2009 250 9.33 2.78 5.1 13.00 4.71 2.95 9.72 6.78 1.00 - 2003 2.00 45.5% 1996 19 0.35 5.15 23.1% 2008 177 16.00 37.00 - 2006 6.75 - 1999 45 2.6% 5.8% 3.9 17.70 1.67 - 1996 2.7 250 140 70 80 120 255 370 455 375 246 - 1991 1.48 - 1998 1999 2000 0.35 10.278 2.86 9.50 18.4 1993 6 0.09 5.00 12.34 6.50 8.20% Source: Author’s own .904 4.05 16.10 35.6% 2002 117 2.9% 1998 33 1.89 - 1995 4.00 24.27 50.74 0.0% 2001 89 2.75 - 2007 12.03 11.00 76.38 5.50 74.11 2.00 7.00 25.4% 2006 121 10.494 4.00 51.70 - 1993 4.90 24.116 9.00 24.85 4.72 26.8 33.468 5.33 1.00 14.81 50.78 0.10 5.4% 2005 139 7.00 8.5 80.74 0.50 18.16 26.092 1.48 5.72 4.50 - 2002 1.17 3.50 - 2004 4.5 117.2 132.183 - 1990 21.11 0.86 2.22 4.99 6.44 13.75 - 2009 3.2 1991 1 0.00 7.9% 2004 156 8.00 36.00 14.66 3.33 7.87 3.54 75.3 38.
184 - Projections Assuming constant fundraising in 2010E/2011E/2012E as of 2009 Probability of future transaction distribution Fund raised 2005 1999 132.Appendix .7 20% 2000 250 30% 2001 140 20% 2002 70 10% 2003 80 5% 2004 120 0% 2005 255 2006 370 2007 455 2008 375 2009 246 2010E 246 2011E 246 2012E 246 2013E 246 246 2006 10% 20% 30% 20% 10% 5% 0% 2007 5% 10% 20% 30% 20% 10% 5% 0% 2008 0% 5% 10% 20% 30% 20% 10% 5% 0% 2009 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 2010E 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 2011E 2012E 2013E 2014E 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 0% 5% 10% 20% 30% 20% 10% 5% 0% .
0 2007 0.0 45.0 16.0 0.6%) Average Base case (6.7 17.0 14.0 6.0 0.5 75.8 2011E 0.0 0.0 0.0 2013E 0.3 10.0 0.0 0.0 28.0 7.9 2005 7.8 49.1 20.0 339.20% .3 0.0 0.2 24.0 12.0 16.0 2008 0.5 14.0 0.0 0.0 0.0 50.0 132.5 0.5 22.3 10.0 0.1 16.0 25.5 19.0 2012E 19.4 13.5 49.0 318.0 0.0 91.0 14.0 0.5 74.4 2014E 0.0 0.0 7.0 0.0 0.4 23.5 2009 2010E 0.0 12.4%) Average Upside case (7.6 12.4 2014E 16.8 0.1 16.0 0.0 12.0 2001 28.0 24.0 0.0 0.0 136.6 12.0 0.0 0.0 18.0 0.0 111.0 2009 0.5 45.0 76.9 2013E 0.0 121.5 7.1 9.0 2011E 17.0 12.0 2004 0.0 0.0 0.5 12.3 0.0 0.0 22.0 250.0 0.0 0.0 51.0 0.3 Projections Years Downside case (5.0 0.0 0.5 18.4 2008 0.41% 7.0 0.0 2002 7.0 0.0 0.0 2012E 0.0 0.0 6.3 0.1 2009 2010E 9.0 353.3 0.0 0.5 133.2%) Average Source: Author’s own 5.0 0.1 14.0 0.0 0.0 0.0 0.2 24.0 2010E 0.0 2011E 0.0 3.0 21.0 112.5 .0 2006 0.0 0.0 0.0 42.0 0.7 25.0 51.0 0.0 TOTAL 140.0 21.0 37.8 0.6 12.0 0.3 2000 75.5 18.0 0.0 24.0 176.3 0.5 7.0 2003 4.0 16.0 18.0 0.0 0.5 8.0 0.185 - 2007 6.5 74.4 2008 16.0 0.5 2006 10.0 0.0 8.0 73.0 0.9 20.7 24.0 12.4 13.3 2007 13.8 22.8 0.5 13.0 298.0 0.0 0.0 0.0 0.0 37.60% 6.5 2013E 19.8 37.0 0.0 2005 0.5 75.1 9.Appendix Commitments available to transact on the secondary market 2005 2006 1999 26.8 2012E 0.0 0.0 36.6 25.0 21.0 25.0 24.0 4.0 91.0 24.
1 LBO funds Secondary bids for LBO funds over time (in % of NAV): 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 2005 2006 2007 H108 H208 H1 09 H2 09 H1 10 Average High Average Median Average Low Source: Author’s own based on data from Cogent Partners pricing analysis (2007-2008-2009-2010).186 - 10. Historical valuations in the Private Equity secondary market 10. 10.Appendix . .2 Venture capital funds Secondary bids for venture capital funds over time (in % of NAV): 110% 100% 90% 80% 70% 60% Average low 50% 40% 30% 2005 2006 2007 H108 H208 H1 09 H2 09 Average median Average high Source: Author’s own based on data from Cogent Partners pricing analysis (2007-2008-2009).
187 - 10. .Appendix .infrastructure. infrastructure and distressed funds over time (in % of NAV): 110% 100% 90% 80% 70% 60% 50% 40% 30% 2005 2006 2007 H108 H208 H1 09 H2 09 Average high Average median Average low Source: Author’s own based on data from Cogent Partners pricing analysis (2007-2008-2009).distressed) Secondary bids for real estate.3 Other funds (real estate.
1 Structure of listed direct Private Equity fund Source: Website of LPX Group .Appendix .188 - 11. Structure of listed Private Equity funds 11.
Appendix .189 - 11.2 Structure of listed indirect Private Equity fund (listed fund of funds) Source: Website of LPX Group .
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