Commonfund sees value in overlooked secondary niches

While many investors are frustrated with high prices on secondary private equity assets, Commonfund still sees value in overlooked corners of the market.

The market for secondary transactions, which Evercore recently reported grew a third to $72 billion in 2018 from $54 billion in 2017, is playing an increasingly important role in investors’ PE strategies.

Commonfund, which was founded in 1971 and manages $24.1 billion in endowment and foundation assets, tries to stay a step ahead by looking for opportunities in venture capital, emerging markets and other areas where competition is less heated and prices are lower.

‘Diamonds in the rough’

The Wilton, Connecticut, firm is often able to buy at better prices because it has the resources to perform thorough due diligence and gain an “information edge” in evaluating potential secondary purchases, Commonfund Capital President and CEO Peter Burns said at the firm’s 2019 outlook breakfast panel Jan. 29.

“It’s an area where we still see less efficiency because sellers want out and are often less concerned with pricing if it makes their lives easier. So we think there are still attractive buys,” Burns said.

“We find that many investors don’t understand what is actually in their portfolio, so it’s that information edge that I mentioned: If you know their portfolio better than they do, you might think that there’s some diamonds in the rough in those portfolios.”

Buyers aren’t seeing much of a discount, with secondaries often trading for 95 percent of asset value, Burns said. Some high-quality funds are priced at full value or a premium, he added.

Commonfund has been able to buy at discounts ranging 15 to 20 percent, in part by avoiding the safe but overcrowded large-buyout market.

Smaller buyouts offer less competition, since many secondary buyers and sellers are focusing on larger portfolios, Burns said.

Emerging markets and venture are another area where Commonfund says it can find good deals. Venture represented just 9 percent of secondary transactions by transaction volume in 2018, Evercore reports.

“If you look at a venture capital portfolio, many investors would say ‘I have no idea which ones are the winners in there, so I’m not even going to look.’ So that is an area where we spend a lot of time,” Burns said.

Secondary activity will likely rise further in 2019, Burns said. For one thing, 2007 was a peak fundraising year, so sales of interests in those funds will likely increase overall supply as investors look to cash out.

For another, GP-led transactions are becoming more common as more high-profile managers explore secondary options for older funds.

And finally, secondary sales are becoming more commonplace as an active management tool for LPs, and new CIOs increasingly use secondaries to reshape legacy investment portfolios to better match their own preferences, Burns said.

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