At exclusive secondaries dinner, a provocative proposal, hope for market upswing

At a recent super-secret secondaries dinner held primarily for buyers in London, attendees were asked to fill out a survey and list a few of their “provocative” ideas for the future of secondaries.

One of those provocative ideas, or perhaps a better word would be “concerns,” was this: General partners should begin crafting fund documents to hinder secondary sales. This could come in the form of GPs writing into limited-partner agreements the ability to appoint buyers for fund interests, taking more control over the secondary sale process.

As of now, most LPAs say that general partners must approve all transfers of fund interests; however, most documents make clear that the GPs will not “unreasonably” withhold approval.

It’s that “reasonable” language that could be removed to give GPs even more control over the process of moving a fund interest from one LP to another.

At least one buyer on the secondary market has this in mind. And it likely stems from some GPs trying to take more control of the process as secondary transfers become routine.

A few funds out there include in contracts right-of-first-refusal language that gives existing LPs in a fund the right to buy a fellow LP’s interest at the price that LP has already agreed upon with a potential buyer.

In this case, an LP finds a buyer for his fund interest at a certain price, presents that proposal to the GP, and the GP reaches out to the entire existing LP base to give existing LPs the chance to match the offer.

The other concern among secondary-market players is GPs handing out secondary fund interests at attractive pricing as favors for things like a primary commitment in the next fund. GPs would have an easier time doing this if they had absolute control of the process (without recourse to reasonableness) in the limited-partner agreement.

Again, this was just one provocative scenario among many presented by attendees at the dinner.

More than 50 buyers in the secondary market from around Europe attended the event, held at Smith & Wollensky in London. The event was run by intermediary Setter Capital and secondary firm Kline Hill Partners.

Proceeds from the ticket sales went to the Canadian Food for Children charity, and Setter covered the cost of the event, according to Simren Desai, senior vice president at Setter.

Sentiment at the dinner was one of subdued anticipation for the market to get busy, Desai said. Secondary activity up through March was slow, but started to pick up “literally in the last two weeks,” Desai said.

“There’s been some uncertainty in markets. … The frothy, aggressive pricing we saw previously … has led to a bit of a bid/ask spread between buyers and sellers,” Desai said.

Some other interesting findings based on an informal survey of attendees include: the biggest business-level challenges cited by secondary buyers (excluding fundraising and performance) were compliance and regulatory issues and hiring and team development. Attendees estimated the annual deal volume range over the next five years at a high of $52 billion and a low of $34 billion.

Mike Bego, managing partner at Kline Hill, has run these super-exclusive secondary dinners in New York for years. The recent London event was the first branching out of the event and it proved a big draw, considering the very first secondary dinner Bego held some 10 years ago attracted all of four people.

Just another sign that this niche corner within an already niche asset class is slowly becoming less … “nichey.”

Action Item: Check out Setter’s most recent secondary volume report here: http://bit.ly/1S5OGPT

Photo: A woman sits near her goods at the Feira da Ladra (Thieves Fair) in Lisbon on May 10, 2011. Feira da Ladra is the oldest flea market in Lisbon where people buy and sell products. Courtesy Reuters/Jose Manuel Ribeiro