Secondary interests in private equity funds are fast approaching par, according to new dat from PE advisory firm Triago.
It shows that average top pricings for large European buyout fund stakes hit 97% of cost in the second half of 2010, compared to 91% in the first half. Large U.S. buyout funds came in just a bit lower at 96% (compared to 89%), followed by middle-market European buyouts (93%/85%) and U.S. middle-market buyout funds (92%/86%).
Venture capital funds came in last at 87% for the second half of 2010, although that still was a significant improvement over 80% of par in the first half.
All of this is great news for sellers, who for the past several years have been forced to accept significant discounts for their fund positions. But it also goes to illustrate the giant mistakes made by buyers in the financial crisis’ wake.
After Lehman Brothers collapsed in late 2008, a conventional wisdom began to emerge that 2009 would be the year of private equity secondaries. Tens of billions of dollars had been raised for new funds, and the world was full of desperate sellers (particularly those pension funds and endowments with large unfunded commitments to mega-buyout funds).
But secondary funds mostly sat on their hands in 2009, fretting over the prospect of catching a falling knife. Volume fell by nearly 50% from the 2008 record of $15 billion, as only the most liquidity-challenged sellers were able to complete transactions(sometimes by “donating” funded commitments in exchange for being able to offload the unfunded).
Such reticence to invest proved to be a colossal mistake. By the time that deal volume rebounded last year to exceed $20 billion, prices had begun to rise. Not only because of an economic recovery that rubbed off on the private equity industry’s mark-to-market accounting, but also because many of last year’s buyers were more strategic than desperate (i.e., portfolio management efforts, not portfolio dumping efforts).
What to watch for now is if “par” proves to be an inflection point, where secondary deal volume again trends down. It would make theoretical sense, given the private equity mantra of buying low and selling high. But I wouldn’t bet on it, because private equity reality is to buy high with the hopes of someday being able to sell even higher.