Over the past 20 years, private equity has been one of the fastest-growing segments of the financial market. Private equity firms have raised record amounts of capital from individuals and institutions. In the past, the combination of financial investors, highly motivated owner-managers, and the opportunity for both to earn exceptional investment returns has spawned phenomenal growth. Institutional and individual investors have increased their targets in the alternative asset and private equity class.
Over the past several years many have surpassed their allocation targets. With little capacity for new commitments, many have become far more selective. Part of the reasoning stems from a sharp decline in returns and the stock market. This has created a tougher fund-raising market for private equity firms, and a growing willingness to make concessions in order to lock-in commitments. A key part of that expansion is the unprecedented growth of the Secondary Market in Private Equity. A Secondary Market is a natural step in the evolution and growth in the industry.
The Secondary Market
The Secondary Market has experienced significant growth over the past decade and is set to grow at a healthy rate in the future. The market for secondary private equity has been fueled by several of the following key factors:
- A slowdown in distributions from venture and buyout partnerships: Limited Partners in private equity funds have experienced a slowdown in distributions. When Limited Partners don’t get liquidity from distributions, they have few options for getting their money out other than a secondary sale.
- The need of LPs to maintain relationships with GPs as their portfolios grow: Limited Partners need to make room for fresh commitments to funds of many of the same General Partners whose funds were in a divested block. Limited Partners also cite the likelihood of facing high capital reserve requirements as reason to sell interests.
- Ending relationships with General Partners: Institutional investors are looking to put additional capital with better managers. As investors near allocation limits, one way to free up capital for investment with preferred firms is to sell off holdings in funds that no longer meet their criteria.
- Mergers and Acquisitions: For example, Royal Bank of Scotland’s sale of partnership assets had roots in a takeover battle for NatWest Equity Partners Ltd., London. Raytheon Co., Lexington, Mass., sold a portfolio of private equity partnership interests in 1999, after acquiring the assets through the purchase of the defense business of Hughes Electronics Corporation.
- Changing needs of individual investors: The volume of deals offered by wealthy individuals and families has risen sharply. In several cases, the sellers are entrepreneurs who committed to venture capital funds when their net worth was in the hundreds of millions of dollars. With the market downturn, these entrepreneurs and families are having difficulty meeting the capital calls of the funds to which they made commitments.
- An affordable way to enter the Alternative Asset and Private Equity class: The volume of secondary deals offered by institutions and individuals has created a unique opportunity to enter the asset class several years into a partnership at a discount with an ability to get a view on the underlying assets. Many investors are beginning to see the value and enhanced returns associated with acquisitions and divestitures of limited partnership interests.
As a key advisor, The Camelot Group manages and facilitates the execution of secondary transactions. Secondary transactions are complex and time-consuming. The amount of information necessary for purchasers to make informed buying decisions coupled with the growing number of active secondary buyers make our services relevant. Our professionals have managed dynamic secondary transactions which enable buyers, sellers, and stake holders (like General Partners) to reap several of the following key benefits:
General Partners benefit from the assurance that secondary transactions are conducted with maximum respect for the privacy of their business. Having a quality advisor who represents the confidentiality of a transaction, who can organize a smooth transfer of interests, and who can introduce new Limited Partners to the General Partners is critical to the success of a transaction.
Limited Partners benefit from the liquidity and monetisation of assets that secondary transactions provide. The secondary market allows managers to reconstruct their asset allocation with a higher level of control. Additionally, Limited Partners can take advantage of the growing market of buyers.
Limited Partners interested in acquiring alternative assets and private equity limited partnership interests have one of the best opportunities in the history of the asset class to purchase at attractive prices. The transparency of secondary interest acquisitions gives the buyer a unique advantage to enter the fund lifecycle closer to a point of distribution which enhances returns significantly.