Secondary deals seen picking up

After a year of little activity, investors are likely better positioned to sell stakes in private equity funds on the secondary market this year because the price gap between buyers and sellers has narrowed, two industry executives said last week.

Last year, a number of high-profile endowments, including Harvard University and Stanford University, expressed interest in selling on the secondary market.

But some of the big name university endowments had trouble last year, in part because their plans were discussed so prominently in the market, said Jean-Marc Cuvilly, a partner at Triago, a placement agent and secondary specialist.

In late December, for example, months after launching one of the most closely watched private equity secondary offerings of the year, Stanford University decided not to follow through with the sale. Stanford Management Co., which manages the university’s investment assets, had explored the sale of up to $1 billion of $6 billion in illiquid investments earlier this year.

“That much publicity was not helpful,” Cuvilly said.

“What you will see now is the people who sat on the sidelines in 2009 will become more active this year,” Cuvilly said.

This year, however, should be better, in part because prices have normalized to levels where investors are ready to move forward again.

With an estimated $490 billion in capital ready to be deployed, the landscape should improve significantly, said Cuvilly and Jeremie Le Febvre, another partner at Triago.

Cuvilly said high-quality funds are now selling at par to a 20% discount, while a few months ago they were typically seeing 30% to 50% discounts.

For funds that are early in their life cycles and are yet to be invested, the change is even more dramatic, he said, citing discounts of 70% to 100% earlier during the financial crisis, compared with 25% to 50% now.

“We saw a big change in pricing from last fall,” said Cuvilly, who added that there had been a dramatic gap between supply and demand. “Suddenly, there was a huge amount of capital. Now we are in a seller’s market,” he explained.

As private equity investors eye new opportunities around the world, China appears to be on almost everyone’s wish list, Cuvilly and Le Febvre said.

“People are looking to move outside of the United States and are looking to move to Asia. They are looking at China India and maybe other developing economies,” Cuvilly said. “There is a strong, strong focus on China right now because everyone wants to get a piece of that.”

What remains to be seen is whether Stanford and other endowments will take part in any secondary sale this year.

Stanford operates the third-largest university endowment nationwide, after Harvard and Yale University. However, it had dropped in value to $12.6 billion as of Aug. 31, compared to the previous year, as the volatile public markets hit all the endowments nationwide.

At the time, Stanford said its planned secondary sale represented less than 7% of its total investment portfolio.