Rich pickings for Secondaries –

While private equity fund raising hit record highs in 2005 and expects to be as busy in 2006 with around 680 new funds on the road looking to raise some $217 billion, secondaries players are preparing themselves for lucrative years ahead with certain players claiming that as much as 25% of their deal flow has come from players exiting the private equity market. The figure seems unusually high, particularly given that allocations to private equity funds show no sign of abating.

Antoine Drean, founder and managing partner of private equity adviser Triago, considers this figure to be a surprisingly high proportion of players exiting the private equity space and considers the increase in activity to be more about investors restructuring portfolios rather than exiting the asset class completely. “There aren’t so many people getting out of private equity right now; the main issue is restructuring portfolios. We don’t see so many players completely exiting the market. If you look at the market today, the issue for most LPs is how can I get in quickly so we’re seeing more buyers and it’s actually more difficult to find sellers,” he said.

On the back of the fund-raising frenzy of the last year and the one forecast for the year ahead, Drean is anticipating a secondaries boom and to prepare for this, his firm recently boosted its Triago-X staff. Triago-X is a company that Triago set up in 2004 dedicated to private equity secondary transactions of private equity fund interests. The venture has taken a while to gain pace mainly due to the ever secretive nature of the secondaries market, but the business continues to grow as the market develops, with three times more transactions closed in 2005 compared to 2004. Triago-X clients range from major European and U.S. institutional investors to corporates or private groups from all around the world.

The most recent addition to the Triago-X team is Alain Madelin, the former French Minister of Finance, as a senior advisor. Madelin brings his in-depth understanding of the global economy and contacts with leading financial institutions to the global development of Triago-X activities. Drean says: “The private equity secondary market is still in its infancy and possesses a number of very interesting growth opportunities. Triago-X is committed to strengthening its position as a leading player in this evolving market. That’s why we appointed Madelin. He’s a high profile spokesman for the secondary market as a whole and he’s already quite active as ex-finance minister and as a prominent figure on the continent in politics. He’s got a pretty thick contact book not only in France, but also in Germany and Scandinavia and he can really help us to reach top people. We’re already talking to around 30 plus leads with him.”

Madelin’s objective is to help establish new and develop existing relationships internationally with key decision makers at major financial institutions.

According to Triago-X, the secondary private equity market was valued at around ?8bn in 2005, accounting for between 1% and 2% of the volume of private equity assets under management worldwide. Drean predicts this figure will grow rapidly and reach up to 5% medium to long-term.

Coller Capital’s next fund raising, which is rumored to be more than double the size of its last fund, the $2.6 billion CIP IV, would make it over half the size of the total amount of secondaries capital available to invest worldwide. This estimate only includes ring-fenced funds however, and so misses the contribution of big, off-balance sheet secondary investors, such as BancBoston Capital. There are also rumors of a launch of a fund-of-funds business within the Coller group, which would seem a logical step considering Coller’s relationships in both the GP and LP communities.

Marleen Groen, CEO of Greenpark Capital, a global private equity secondaries investment adviser, however, does not see this as a growing trend among secondaries players and sees a combination of fund-of-funds and secondaries as more of an asset management approach. “Firms such as Partners Group and HarbourVest have an asset management approach. The larger secondaries players coming from a secondaries background are unlikely to find it appealing to turn themselves into asset managers. There are numerous fund-of-funds around and I don’t think investors would find new offerings that attractive.”

She adds: “With the private equity fund raising boom of last year and ever increasing buyout sizes, which may or may not deliver the expected returns to LPs, we are predicting a wave of deal flow set to come their way in a few years’ time.”

In Groen’s opinion, there are currently too many investors trying to access the asset class quickly and with a lot of capital. She says: “I think a number of firms are going into deals with very significant amounts of money. Because of this, we may well see an attractive secondary wave in two to three years’ time because not everyone is going to be happy with their returns. This time round it’s not going to be particularly the venture returns suffering, it will be more across the board. So there should be attractive pickings for the secondaries players.”

The reality is that buyout returns in particular are not expected to deliver the stellar returns of years gone by and many LPs are prepared for this. Most of these LPs will be satisfied with returns of between 10% and 12%; Groen says this may even go up to 15% if a fund is lucky. “That’s not a bad return for primaries,” she says. “But there are equally still a lot of LPs expecting returns in the region of the high 10s/low 20s or even more and that is not going to happen for quite a number of investors.” Expected average returns might not even be as much as 15% and for many groups you might be talking 10% and even single digits. Secondaries players are waiting for the disgruntled investors to come running.