Stanford nixes planned secondary sale

Months after launching one of the most closely watched private equity secondary offerings of the year, Stanford University has decided not to follow through with the sale.

Stanford Management Co. (SMC), 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.

The assets include private equity investment partnerships in buyout, growth and venture funds as well as in natural resources, real estate and distressed securities.

Plans for the secondary sale came together after the portfolio was buffeted by declines in late 2008 and early 2009. But with markets recovering, SMC reversed course in December.

“The market recovery meant that the value of our liquid assets improved, which improved our liquidity positions,” John Powers, CEO of SMC, tells PE Week.

Powers adds that the decision to scuttle the secondary offering was not related to bid offers, as he notes: “If anything, we were surprised to the good about the pricing.”

Palo Alto, Calif.-based Stanford operates the third-largest university endowment nationwide, after Harvard and Yale. However, it had dropped in value to $12.6 billion as of Aug. 31, compared with a year ago, as the volatile public markets hit all the endowments nationwide. Yale reported a 30% drop in its endowment to $16 billion while Harvard, said its endowment contracted 27.3 percent. The University of Pennsylvania, in Philadelphia, lost only 15.7% after it put more of its assets into fixed income securities.

Stanford said the planned secondary sale represented less than 7% of its total investment portfolio. As of June 2008, Stanford’s portfolio allocation system called for 12% of total assets to be invested in private equity. Other targeted assets included public equity (37%), real estate (16%), natural resources (7%), absolute return investments (18%) and fixed income assets (10%).

SMC reviewed initial bids in October and had not intended to sell majority interest in any single investment partnership. Secondary market investment banking and advisory firm Cogent Partners was working with the university to find buyers. University officials decided against the sale despite receiving four final bids valuing the portfolio in the range of 80 cents to 85 cents of their appraised value on Sept. 30, according to a report in The Wall Street Journal, citing a person familiar with the matter.

Powers declined to comment on specific bid valuations.

Stanford’s planned secondary offering was unusual in that bidders were asked to put offers on an entire portfolio in a particular asset class, rather than a specific fund or fund manager. That allowed potential buyers to obtain stakes in top-tier funds that are not often sold on secondary markets.

Powers says he believes that approach was sensible because “it gave buyers interesting assets to look at,” while still allowing the university to maintain its relationships with existing managers.

One limited partner, who asked not to named, said the pressure on Stanford to sell stakes may have eased some by the fact that LPs were by and large not being asked to make capital calls in 2009–thus limiting the need for immediate cash-on-hand. Powers described the pace of capital calls over the past year as “moderate.”

The LP added that private equity portfolio values are expected to recover some, riding the coattails of the rebound in public markets. Additionally, the LP said that general partners in their portfolio were planning markups in the fourth quarter.

The university has taken other steps this year to shore up liquidity following the market downturn. In April, it raised $1 billion in a taxable bond issuance, using part to retire debt and keeping $800 million “as a liquidity buffer for the university,” according to a university press release. Those funds remain in a cash reserve and could be drawn to meet unanticipated needs.

Powers says the endowment hasn’t ruled out a future secondary offering, but the improving liquidity situation means there’s no sense of urgency. “With no need to sell, we’ll continue to evaluate the options,” he says.

Stanford’s decision to withdraw the offering comes as secondary market investment activity appears to be intensifying. A recent report from Probitas Partners, which manages primary fund-raising and secondary sales for venture and private equity firms, estimated that there is about $21 billion in secondary pools either already in the market or expected to be in 2010.

Rising prices for secondary interests, a sizable pool of interests for sale, and a host of new buyers hitting the market, it found, are contributing factors in generating more activity in the secondary sector.

Another recent survey, from secondary firm Coller Capital, found that 32% of the 108 LPs surveyed said they expect to invest in more secondaries in the next two years, while another 37% said they will at least hold their exposure steady at current levels.

Reuters contributed to this report.