General partners have become more receptive to approving secondary sales, lowering barriers to exit for institutional investors.
According to panelists at Harvard Business School’s Venture Capital and Private Equity Conference, GPs have become more accommodating of LP exits because it lowers the time commitment threshold for new investors.
Investors who may have been worried about the typical 10-year time horizon on private equity investments may be more willing to invest now that a fluid, robust secondary market exists.
“If you look back 15 years ago, GPs viewed secondaries as kind of ‘all pain, no gain’,” said Katahdin Donner partner Jamie Hale. “GPs are beginning to think of this market as good for them … If you reduce those barriers to entry, because of people’s fear of the barriers to exit if [they] need to sell … more people will probably come into the market to participate.”
Why do you want to keep an upset, reluctant LP who you know is not going to be in your next fund anyway? Try to find a replacement limited partner who clearly wants to know you better, clearly likes your portfolio and your price and may invest in your next fund.
Philip Tsai of UBS echoed Hale’s point, arguing that GPs are starting to view secondaries as an opportunity to engage investors in future funds.
“That’s how we sell it to GPs. Why do you want to keep an upset, reluctant LP who you know is not going to be in your next fund anyway?” he said. “Try to find a replacement limited partner who clearly wants to know you better, clearly likes your portfolio and your price and may invest in your next fund.”
UBS is running two major secondary sales this year: both the New York City pension system and the Government of Singapore Investment Corporation are trying to sell about $750 million each of their portfolios.
The development of the global secondaries market has even led GPs to include path to exit strategies in fund terms, according to John Toomey of HarbourVest Partners. Some firms have begun putting together lists of interested buyers in their fund’s stakes, which they then distribute to their LPs in the event those investors ever want to unload their commitments, he said.
Although the development of the secondaries market may allow GPs to expand their network of investor relationships, the market’s evolution could have consequences for firms that are fundraising. Tsai cautioned that secondaries could lead GPs to “cannibalise” their own marketing effort. For example, an LP looking to make a $100 million primary commitment to a private equity fund could lower their commitment if they see an opportunity to make a smaller secondary commitment as well, Tsai said.
Secondary deal volume hit a record high again in 2011. Private equity intermediary NYPPEX and broker Cogent Partners have both released studies placing overall deal volume at more than $25 billion. According to Tsai, a majority of investors polled by UBS expect secondary deal volume to remain at the same level or grow in 2012.