|
|
|
Actualités
Measuring Performance As The Secondary Market Evolves
15/03/2007 - Source : Guide to the Secondary Market - Dow Jones
by Charles Soulignac, Chairman and Chief Executive Officer, Fondinvest Capital
|
The players and opportunities in the secondary market are changing significantly. Secondary funds are growing in terms of size, some now exceeding €4 billion. But what have all these changes done to performance measurement?
Buyers
The number of pure players, some of whom have been operating in the secondary market since 1990, is estimated to be nearly 20. Among them, almost six to eight intend to raise large amounts of capital, while the remaining buyers who have a long-standing presence both on the American and European markets are successively raising funds but in lower amounts.
More recently, some primary funds of funds have allocated funds to secondaries, in particular in Europe, in order to counteract the J-curve. As a native of Southern France, where wine has been a real industry for decades (even before private equity!), I can assure you that mixing a good red wine with a good white wine does not make a good rosé.
This is also true for private equity. Mixing both primaries and secondaries is purely a marketing strategy for inexperienced institutional investors. As a matter of fact, to smooth the J-curve effect, one needs to find the good secondary deal at the right time and this can be quite difficult.
The institutional investors who directly invested in secondary acquisitions from 2002 to 2005 are slowing down the pace of their investment as they are no longer satisfied with the acquisition terms. It is a fact that we need to have experience in order to work on secondary deals.
Intermediaries
Some big European and American intermediary firms have rationalized the auction and sale processes. They usually deal with sales exceeding $50 million and contact about 15 buyers, depending on the kind of transaction concerned.
On the other hand, other domestic firms that are focused on mid-market transactions go and see a limited number of buyers – three or four maximum, and even just one in some cases, when, for instance, there are confidentiality concerns.
The intermediation, which mainly concerns sales of significant amounts, represents about one-third of the secondary market.
Opportunities
Investors in private equity funds both in the U.S. and Europe are satisfied – even very satisfied – with their investment returns over the last 12 months.
Compared to the past, sales of significant interests in funds have massively decreased, with very few sales exceeding $200 million occurring in fiscal year 2006. Sales representing a low amount and a limited number of interests have continued increasing not only for liquidity reasons but also because they result from active portfolio management, as it is the case for other asset categories.
Therefore, in order to increase the volume of their interests, secondary players have decided to acquire portfolio of interests in companies. These interests purchased from one or various sellers will be gathered in one appropriate vehicle. Some secondary managers manage such vehicles; others entrust some specialized managers with such task, giving birth to a new activity: GP for hire.
Some of these managers have gotten a taste of management for one secondary player and are raising appropriate funds, which are usually committed by various secondary players. They intend to buy either portfolios or a company.
With regards to the amount currently available and a limited number of opportunities, there is some price pressure, as it is the case in primaries. So, the right place to invest in is small and medium-sized deals where pressure is lower than in large deals.
The price, regardless of the discount, is based on good knowledge of the underlying assets of the fund purchased, as well as the skills of the GP. The ability to assess the potential of the assets is therefore critical in selecting a manager. Besides the price, the accuracy of the information provided, the ability to deliver the deal and GP approval are also fundamental, especially in an extensive transaction process.
Outlook
Regardless of some experts’ macroeconomic predictions, particularly around when credit risks might rise, some primary players operate in highly competitive markets with a very active debt market.
Given that situation, even investors with little experience in private equity will choose between performing and non-performing funds, and to prove it, some investors will not re-invest in certain funds even if they are oversubscribed.
Considering the funds raised on the primary market over the last five years, there will undoubtedly be some secondary opportunities for small deals as well as for big ones.
Performance Measurement
For some secondary players, the internal rate of return, or IRR, is the only benchmark that matters. But they forget that an IRR, considered alone, does not mean anything. It needs to be related to a duration.
A second, less common benchmark is the payback. Many investors are amazed when they receive returns one or two years after investing. Then they immediately ask about the remaining net asset value, or NAV.
The third benchmark is the multiple, which takes into account the NAV. It’s also called total value paid in, or TVPI, or expected multiple.
In measuring performance on the secondary market, the IRR, the payback and the TVPI should all be taken into account.
Advantages Of Investing In The Secondary Market
The secondary market is undoubtedly complementary to a private equity allocation in terms of accelerated returns measured by IRR. However, the multiple is also critical and makes the difference between secondary private equity and other more traditional asset categories.
An investor can select among 20 or so worldwide secondary pure players. As it is the case for the primary market, the investor has to select a GP with proven performance over a long period, steady deal flow and adequacy between human and financial resources and market cover.
|
Sommaire actualités
|
|
|
|
