Trident Point Capital, a US-based alternative asset manager, is setting itself up as a broker for secondary private equity interests. Established last November by Michael Rudnicki, formerly with investment consulting firm BARRA RogersCasey (BRC), Trident aims to help match buyers and sellers of limited partnership interests.
Rudnicki, managing director of Trident, says: “We are proposing to be an ‘honest broker’ co-ordinating the sale of private equity and venture capital LP interests for sellers.” As well as providing liquidity Rudnicki aims to find a mutually agreeable price for the two parties, help navigate the market, structure transactions and provide transparency on the process.
The rising private equity commitments of institutional investors in recent years has led to predictions that the secondary market will soon take off in a big way. This trend is accentuated by the economic downturn and also by the fall in both private equity and public market valuations, which means many investors’ private equity allocations are skewed. Trident predicts the secondary market, worth $10.9 billion since 1990, will be valued at $55.6 billion by 2010.
Elly Livingstone, associate director of Pantheon Ventures where he has responsibility for European secondary investing, says: “There is no established specialist intermediary at the moment but there is the potential opportunity for someone to step into this role.” He expects to see more activity from intermediaries (which include corporate finance boutiques, investment banks, placement agents, like Atlantic-Pacific Capital and H2 Advisors, and online exchanges such as PrivateTrade.com) in the growing secondary market. “Sellers are looking for someone who can pull all the information together quickly on their behalf, so that potential buyers can then review it and make an offer. Major secondary players already have access to the information on portfolios, so it’s more a case of speeding up the process,” says Livingstone.
Trident says sellers are often unfamiliar with the market and can make mistakes, such as signing exclusivity agreements and approaching inappropriate buyers, which means they do not get maximum value from the deal. Rudnicki believes his work at BRC (where clients included US Airways, Pennsylvania SERS, New Mexico State Investment Council, and San Diego CERA) helped him establish a good knowledge of secondary buyers and the interests they would like to buy.
Rudnicki says sellers range from institutional investors, such as municipalities, to high net worth individuals with less mature venture profiles that are not going to realise gains and have come to be viewed as an administrative burden. He says most vendors are not desperate to sell and some are just looking to re-position their private equity portfolio, rather than withdraw from the asset class altogether. Others are simply looking for a valuation of their investments, Trident is used by these investors to check up on general partners and see if their valuations are accurate.
Prices offered are at generally at about a 40 per cent discount on venture portfolios and between 25 per cent and 30 per cent on buyout portfolios but Rudnicki says this is not a tight distribution and the range varies enormously. The services offered by Trident include vetting the assets for sale and then conducting a private auction.
Rudnicki said: “There are clearing houses for LP investments but sellers need more handholding and buyers want access to inside information.” He claims to be able to match the expectations of buyers and sellers for a fee of one per cent of the cash involved in the transaction. The size of deals Trident has looked at is generally $10 million to $20million, but it has also looked at deals up to $100million and as small as $1 million or $2 million. Vendors are normally selling participations in five or six different funds.
Trident is not raising its own secondaries fund at the moment but Rudnicki anticipates this in the long run. He says potential investors want to see the quality of the firm’s deal flow and a track record first. The company will be appointing a new partner shortly and is also negotiating with a principal in Germany to set up there.