“The market has already seen a lot of activity in the first quarter and I believe it will become even more dynamic throughout the rest of the year. Personally, I expect that 2011 will be a record year in terms of transaction volume, probably around €22 billion in 2011, which would represent a 10% increase compared to last year. Other market participants have a similar optimistic outlook on growth.
The market in private equity secondaries in Europe is still somewhat behind the US, where it has been around for longer and is more mature. Regulatory drivers such as Basel III and Solvency II are likely to add to the supply of dealflow from financial institutions wishing to dispose of some of their private equity programmes and hence we should see some additional attractive investment opportunities over and beyond what we call the ‘base’ transaction volume for the next years to come.
The same drivers hold true for Germany where we have been active since the inception of Greenpark over ten years ago and where we have invested 10% of our funds’ capital. I hope we can increase that even further in the future as Germany is a very attractive market which holds serious potential for private equity with its tremendously successful Mittelstand companies. In the past, secondary dealflow in Germany has been somewhat limited but I think 2011 will show substantially more activity.
I believe the mid-market will continue to provide a very solid risk-return profile for secondaries investors as it less volatile, less leveraged, and generally with a good alignment between the general partners who manage the funds and the investors in these funds. It is in this space where we find the most attractive investment opportunities. Overall, and of course I would say this but I do believe that now is a very good time for investors to consider including secondary funds in their private equity programmes.”
“It means that managers of private equity programmes and portfolios use the secondary market actively to lock in returns, unlock capital to allocate elsewhere, sell down funds that are no longer in the strategic focus of the portfolio or simply reduce the number of relationships. Of the Greenpark dealflow about 40–50% of all transactions that we have seen in the last two years can be classified as portfolio management sales or as sales reflecting a strategic shift in the private equity programmes that held these positions. At the moment, the secondaries market is the only option for managers wanting to obtain liquidity and its ongoing development plays a vital role in increasing the exit options for managers who want to divest private equity fund positions or legacy assets. We believe that active management of private equity programmes is essential for many investors and that the use of the secondary market will increase much further in the future.”
“It has been generally estimated that between 2% and 4% of the primary market capital pool is recycled in the secondaries market each year, representing what we refer to as the ‘base’ global secondaries deal flow. In addition, deal flow in the secondaries market is currently also driven by developments in the worldwide financial markets and changes in the regulatory environment. For example, the capital adequacy requirements of Solvency II and Basel III are placing increased selling pressure particularly on banks and insurance companies, and it follows, therefore, that the secondaries market will be used as an important instrument in active portfolio management going forward. Pension funds will see similar regulation over time and are therefore also expected to become active participants in this market.
On average, according to Greenpark data, banks, corporates and general partners tend to feature most frequently as sellers, making up more than two thirds of our dealflow over recent years. However, the exact percentages of sellers varies from year to year depending on market circumstances and economic cycles. In the economic downturn for example, liquidity requirements were a primary motivation for transactions on the secondaries market and at that time sellers included a large number of endowments, family offices and funds of funds. However, even then, many potential sellers were able to avoid selling in a secondaries market where pricing had fallen to average discounts of 60% of NAV reflecting uncertainty about both asset performance and exit timing and value. The expected major secondary sale activity was avoided as a result of a combination of government funded bank bailouts, the absence of capital calls linked to new investments and a subsequent rise in equities markets.
Dealflow volume in 2010 equalled that of 2008 with an estimated total of $20bn in completed secondary transactions and 2011 is predicted to be even more active with the higher visibility on portfolio performance and revised net asset value levels. This improved transaction environment has allowed sellers to return to the secondaries market primarily for strategic and portfolio management reasons once again.
Risk/return profiles of secondaries funds differ hugely depending on the size of the fund and the secondary strategy chosen. Important factors are for example the type of investments (buyout, venture), the maturity of the secondary investments (early secondaries versus mature secondaries), focus on traditional fund secondaries or on portfolios of direct company interests, and geographical coverage. At Greenpark, we focus on mature, well-diversified, largely buyout secondaries which offer an excellent opportunity to enhance returns, reduce risk and bring forward distribution cash flows. These largely funded portfolios allow for better appraisal of the assets’ performance and their exit timing and value. By focusing on mature secondaries we offer our investors an accelerated deployment of capital (resulting in less fee drag whilst little capital is deployed) and attractive J‑curve mitigation. In addition, our investments have a high portfolio diversification across geographies, industries, vintages, general partners and funds and given our disciplined fund and deal sizes most of our investments do not involve an auction of the interests being sold. Most of the time we offer sellers a structured solution that can be achieved much better in close cooperation between buyer and seller.”