Secondary players: update

That awareness raising was thanks to the sale of NatWest’s equity portfolio in defence of the hostile bid by the ultimately successful Royal Bank of Scotland. Then Chase sold a large part of its equity portfolio into the secondary market. Both events received detailed coverage in the financial press and brought both the existence of the potential of the secondary market to investors’ attention. In contrast Brian Wright, director of Pomona Capital’s European office, notes that when Pomona came to London from the US to set up a European office in 1998 much time was spent “doing missionary work” talking to investors about the secondary market and how they could make use of it.

In 1998 global stock markets were riding high (save for depressed old economy stocks) and the realignment currently taking place was but a twinkle in the eye of secondary investors. That alignment is simply that asset allocations are slightly askew as a result of depressed public markets. Consequently the percentage allocated to alternative assets, of which private equity investments make up a part, is in some cases disproportionately larger than it should be.

Towards the end of last year secondary players were predicting (see evcj’s November issue, p38) that the secondary market would get busier as asset allocations were bought back in line. This deal flow has started to come through. “Most sellers have one common factor and that is that they are not dissatisfied with the underlying assets. GPs [General Partners] recognise that people sell for reasons divorced from the returns of the fund such as M&A and strategic changes within an institution and more recently pro-active management of a portfolio to respond to prevailing market conditions we are seeing exactly that type of deal flow,” said Brian Wright at Pomona Capital.

The reason current deal flow is increasing namely asset allocations slightly askew is a good reminder of why the market is in the state. Jay Pierrepont, managing director responsible for secondary investing at Pantheon Ventures, said: “Pantheon is investing in middle market buyouts. We see this as a safe place to weather the economic storm. These investors have stuck to the knitting and have tended to use more conservative price valuations.”

With the take-up of private equity assets widely understood to be stronger overall in the US than in Europe, founder and chief executive of recently formed Greenpark Capital, Marleen Groen’s observations on deal flow sources are interesting. She notes that while deal flow looks to have originated 75 per cent from the US and 25 per cent from Europe, value wise the split is 50:50. Groen is still largely busy fund raising, which is going to plan. When Greenpark was formed it announced that it would set a target of $200 million for its first fund. Groen’s team now counts seven following the arrival of Daniel Green and Elizabeth Peeters as analysts earlier this year.

The signs are that the secondary market will gather pace over the coming months. “We believe the biggest driver for growth in this market is the active management of portfolios, which is being driven by the fiduciary responsibilities of LP’s,” said Geoff Clark, managing director, Goldman Sachs private equity group.

It is a derivative market and, as many players note, the money continues to flow into the primary market in Europe. So the best is probably some way off. Clark continues: “We expect to see $10 to $15 billion of deals in the secondary market over the next five years.”

How much will get known about what is happening in the secondary market, outside the players themselves, remains to be seen NatWest and Chase-type deals aside. Most note that while the auction and semi-auction exist there is still a large one-to-one market, which is very much a private affair. In these scenarios price is often not the primary motivator as issues such as confidentiality and the ability to execute are pushed to the fore. And another point in their favour, from the secondary player’s perspective, is that having a number of these sub $100 million transactions in a portfolio creates a natural diversity.