Need To Know

Getting an accurate read on the state of the secondary market is a slippery science.

In the third quarter of 2008, expectations grew that this area would see a flood of activity fueled by the denominator effect and the liquidity needs of limited partners squeezed by a lack of distributions. But that never quite materialized. A number of high-profile LPs who floated baskets of their interests reportedly found the bids lacking and pulled them back.

As the public markets tanked toward the end of 2008, the story became the influence of fair value accounting. The year-end numbers provided by buyout firms were supposed to jumpstart trading. But while a number of prominent firms – The Blackstone Group and Kohlberg Kravis Roberts & Co. among them – have written down their holdings as much as 30 percent, many LPs are still waiting for clarity from their general partners.

NYPPEX Private Markets, a secondary transaction advisor, said earlier this month it believes secondary bids continue to over-compensate for uncertainty related to asset write-downs, noting a decline in median bids for interests in private equity partnerships worldwide to 37.5 percent of net asset value as of Jan. 30 from 64.25 percent of net asset value as of Nov, 1 2008. Now the impact of the stock market’s continued struggles in the first quarter of 2009 is being felt, leading potential secondary buyers to further reduce their bids as of March 2, according to NYPPEX.

David Tom, a director of business development with New York-based secondary firm VCFA Group, said trading is still pretty choppy at the moment.

“We’re just not seeing a large number of transactions,” he told Buyouts. “There was a feeling that the write-downs would inject some liquidity but, as it stands now, it doesn’t look like the year-end numbers are going to open the floodgates.”

Meantime, a new survey from U.K.-based research house Prequin provides some evidence the surge in secondary sales is yet to come. The poll, which includes input from more than 220 institutional investors, found 43 percent would consider purchases on the secondary market. Of that 43 percent, 23 percent said they would be “very likely” to do so in 2009.

As for the sell-side, the survey found 9 percent of those polled were considering putting interests up for sale on the secondary market within the next two years. An additional one percent said they were “extremely likely” to pursue a sale.

Interestingly, the perception of the secondary market as a “buyer’s market” in its present condition was questioned by Prequin, which said the actual number of deals getting done hasn’t increased as dramatically as might be expected, given the spread between NAVs [net asset values] and asking prices.

Those tales of fund interests changing hands at deep discounts to NAVs still seem to be largely apocryphal, as documented deals remain few and far between. Prequin asserts: “only those investors most desperate to liquidate investments would be content to exit at such a low price.”

So while the latest NAV numbers would seem to provide buyers and sellers with some semblance of common ground, each still appears content to wait for the other to step out of the shadows.