5 questions with Colin McGrady

Earlier this month, secondary intermediary Cogent Partners released a study that reported that prices of interests in private equity funds on the secondary market are down an average 39% of net asset value in the second half of 2008 from 91.1% in the second half of 2007. The findings are disheartening for any hopeful investor with stakes in the market, and very exciting for buyers of distressed LP stakes.

Cogent Managing Director Colin McGrady recently spoke with PE Week contributor Erin Griffith about some trends he’s seeing in the secondaries market.

Q: What are the concerns for secondary sellers right now?


Institutional investors are really concerned that once the buyout funds start to believe the environment is good to make investments, capital calls will come fast and furious. It won’t be a normalized capital calls pace. There will be nothing in terms of liquidity, and they’ll have a big wall of capital calls that come.

Q: How are secondary funds taking advantage of the market?


For one thing, we’ve had a huge increase in calls from sellers who have tried to sell their interests on their own and ended up abandoning the process. In December it was higher than we ever had. The reason is that buyers have been stalling, for various reasons. Some say they wanted to wait for Q4 numbers.

That is a red herring. Not a single buyer buys based on the valuation a GP is holding. They do their own diligence. So when they continue to tell those prospective sellers to wait for Q4 valuations, they’re just stringing them along. Or maybe they used lower Q4 numbers as a way to justify the low price they planned to pay. Either way, eventually many sellers have said, ‘I can’t wait any longer,’ admitting they’re desperate.

Q: Are you seeing one type of fund or sector more popular on the secondaries market?


We get people calling in with specific requests—wish lists. They say, ‘I want European buyouts,’ or ‘I want Firm X, Y or Z.’

Another trend is that buyers are being so darn selective on what they bid on, even on a proprietary basis. They won’t bid on a whole portfolio if it has a fund they hadn’t heard of, or they end up breaking up pieces of an interest into smaller pieces.

Breaking up the interests actually drives up the value.

Q: Does that make your job more difficult?


[Laughs] I’m happy to receive wish lists!

Q: Is the secondary market becoming saturated?


Not many firms are expecting any liquidity anytime soon. They’re looking at uncalled capital and saying, ‘We could have a serious problem here.’ The easiest way to solve that is the secondary market. But for immature interests in mega-caps, there is no market for those. The big buyers in the secondary market got their fill of those in 2007 when the mega-buyout funds didn’t turn away any capital.