In recent years, the private equity secondary market has enjoyed phenomenal growth in terms of both funds raised and the volume of transactions. Investors in private equity funds increasingly perceive the secondary market not just as a quicker route to liquidity, but also as a tool for portfolio management. Our focus will be on the buying and selling of fund interests and not the transfer of ownership of direct holdings in companies.
Secondary fund managers generally invest in funds which are mature and possess a portfolio of investee companies, compared to primary private equity investors, who take on manager selection risk. In a mature portfolio, it is often easier to distinguish the “peaches” from the “lemons”, therefore secondary fund managers enjoy better asset transparency and to some extent, “the benefits of hindsight”, which hopefully leads to more accurate valuations and lower investment risk.
Nevertheless, pricing a transaction remains one of the most difficult tasks that confront a secondary fund manager because there are so many unknowns involved. Valuations can be performed bottom up or top-down, or a combination of both, so as to derive a value for the assets owned by the fund, which can then be used to derive the value of the exiting LP’s interests. From this starting point, the secondary fund manager will more than likely apply a discount to account for the illiquidity factor, the additional layers of management fees, carried interests and other expenses in a fund.
The discussion for the panel will centre around whether greater transparency will assist or hinder secondary market participants in terms of pricing; as well as fund management, expected returns, liquidity and risk exposure.
The panel includes representation from some of the leading secondary players in the world.
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