| Secondary 101 |
|
|
| 06/03/2005 | |
|
Matthias Rubner, Executive director of the Alternative Investments department at HSBC Trinkaus & Burkhardt, answers this week's 101 on secondaries 1-What is a secondary? A secondary is an investment in an existing private equity fund through the purchase of the fund commitment of an existing investor. The original investor usually committed capital at the fund's launch, which is a primary investment. In the private equity terminology there is also another kind of "secondary" transaction called secondary-buyout which labels the sale of a target company from one private equity fund to another private equity fund. The buyer of a private equity commitment in the secondary market purchases the funded portion as well as the unfunded portion. This means that he buys the already invested portion of the commitment, and as he enters the commitment he has to fulfil future capital calls as well. Therefore it is critical not only to analyse the existing portfolio of the fund, but also to evaluate the fund manager's expertise for future investments. 2-What are the advantages of a secondary for the seller and for the new investor? What about the risks and return for the new investor? Both the seller and the buyer profit from the secondary transaction. Sellers of private equity funds are motivated by a variety of reasons. Over the last years, disappointment with performance of quoted equities and the excellent performance of private equities have led investors to change their asset allocation. The need to realize cash has induced some investors to sell their stake in private equity funds. Sellers are also often motivated by political reasoning such as new risk guidelines or new management on the investor side. The sale then generates new flexibility to invest otherwise or allows the seller to realize profits early in the funds life. The buyer purchases a fund commitment where he can value the already invested portion and therefore get a better understanding of the private equity managers' skills. Buying into a mature portfolio also brings the investor much closer to the often badly needed cash returns. Investing into secondary private equity funds has therefore been a comfortable way for investors to step into private equity while avoiding the J-curve effect by buying funds that will realise exits right away. To sum it up, with a secondary investment, the goal is to achieve return similar to a primary investment in a shorter time with less risk. 3- Why have there been more transactions lately? What do you expect for the further development of the market? First of all, the market has been broadening with respect to the number of private equity investors as well as the number and size of funds. In turn, the secondary deal flow has been growing naturally. Of course the horrible performance listed equities has put pressure on some investors to reduce their overall equity risk exposure. Ironically, it is for this very same reason that often, the top funds were sold at their net asset value or with little discount. Secondary funds of funds like Partners Group's or Axa's vehicles or specialised pure secondary players like Coller or Lexington provide exits to willing sellers and therefore help to keep the asset class moving by providing liquidity to an otherwise illiquid market. |
|
Articles of the same Serie : 101 |
|
Articles of the same Topic : Private equity |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it