Private Equity Secondary Market Heats Up

Deal activity on the private equity secondary market is set to increase significantly in the near term, according to research carried out for the "2010 Preqin Private Equity Secondaries Review," the firm said in an April 26, 2010 statement.

Secondary market transactions involve either the acquisition of interests in private equity limited partnerships from limited partners looking to sell these interests, or the purchase of portfolios of direct investments in operating companies from financial/corporate investors or institutions.

"Already, activity on the secondary market has picked up considerably in 2010, most recently with Bank of America's sale of a $1.9 billion portfolio of fund interests to AXA Private Equity, one of the largest secondary market transactions to date," Helen Kenyon, Preqin's manager of investor data, said in the statement. "We anticipate this growth in activity on the secondary market will continue over the course of the year and into 2011."

The Preqin research supported her optimism. It found that the secondary market will continue to be an important part of investors' private equity investment strategies, with 48% of those surveyed considering secondaries increasingly significant to their strategies and 7% saying it formed a key part of their strategies.

Capital for purchases on the secondary market is abundant, Preqin said. In 2009, secondaries funds enjoyed a banner fundraising year, as the 20 funds that closed raised $23 billion. Moreover, 30% of institutional investors are considering buying fund interests in the next two years.

In March 2010, bids submitted for funds on Preqin's Secondary Market Monitor marketplace discounted fund interests by an average of 17%, way down from an average of 54% just six months earlier. The narrowing bid-ask spread is making pricing more attractive to investors considering sales of fund interests, the firm said.

Indeed, a growing number of investors are considering selling stakes in private equity funds on the secondary market. As of the second quarter of 2010, 13% of those polled said they may do so within the next 24 months, compared with 10% in Q2 2009.

Forty percent of investors surveyed consider the secondary market a useful portfolio rebalancing tool, portending a continuing important role for secondaries in the private equity industry going forward, Preqin concluded.

Michael S. Fischer (msf7@columbia.edu) is a New York-based financial writer and editor and a frequent contributor to Wealth Manager.